Caterpillar Inc. -- Moody's assigns A3 to Caterpillar's $500 million of senior unsecured notes; Outlook stable

Rating Action: Moody's assigns A3 to Caterpillar's $500 million of senior unsecured notes; Outlook stableGlobal Credit Research - 02 Mar 2021New York, March 02, 2021 -- Moody's Investors Service, ("Moody's") assigned an A3 rating to Caterpillar, Inc.'s ('Caterpillar', 'CAT') $500 million of senior unsecured notes. All the other ratings are unaffected, including the A3 long term and Prime-2 short-term ratings of Caterpillar, Inc., Caterpillar Financial Services Corporation (CFSC - based on a support agreement from Caterpillar), and their guaranteed subsidiaries. The outlook is stable.The $500 million of new notes will refinance existing debt.The following ratings are affected by today's action:New Assignments:..Issuer: Caterpillar Inc.....Senior Unsecured Notes, Assigned A3RATINGS RATIONALEThe ratings reflect Caterpillar's position as a leading producer of machinery and equipment that are essential in core sectors of the global economy. Consequently, the long-term demand fundamentals for Caterpillar's products will remain sound despite periodic cyclical downturns..Caterpillar's competitive strengths include: the industry's broadest and most competitive line of construction, energy & transportation and mining equipment; a formidable global dealer network; a broad geographic footprint; and, the leading position in most of its products and markets. In addition, CFSC remains a strategically important and prudently managed wholesale and retail finance arm.Caterpillar is making important progress in strengthening its operating performance through all phases of the business cycle. We expect that the company's margins and return measures will remain higher than historic levels during both cyclical upturns and downturns. The company's resilience during down-market conditions have been demonstrated through the 2020 coronavirus pandemic with industrial EBITA margin sustained above 11% despite a 23% decline in sales.The stable outlook reflects our expectation that Caterpillar's strengthened operating approach and formidable competitive position, combined with a healthy liquidity position, will afford it the operating and financial flexibility to contend with stress in its markets.The liquidity position of Caterpillar and its financial service operations is strong. Principal liquidity sources as of December 2020 total approximately $19.9 billion and include $9.4 billion in cash and securities, and $10.5 billion in availability under committed credit facilities. These liquidity sources provide adequate coverage of the company's $11.2 billion in near term maturing debt.As a global producer of engines and construction equipment, CAT will face the challenge of remaining in compliance with various emission regulations. Moreover, Caterpillar has an elevated level of environmental risk related to its ties to the mining and energy sectors. The company continues to make significant investment through research and development and capital expenditures to comply with these emissions standards. As a result of this focus Moody's expects that CAT will remain largely in compliance with the various regulations to which it is subject. Should any non-compliance occur, Caterpillar has sufficient financial resources to avoid any material stress on the company's financial or credit profile.CAT has a large global work force numbering 40,300 in the US, and 57,000 outside of the US, and employee relations have been adequate. Most of the company's employees are at-will employees and are not covered by any type of employment contract or agreement. However, within the US approximately 6,900 employees are covered by collective bargaining agreements, a significant portion of which expire March 2023. Moody's does not anticipate disruption in CAT's operations from employee relations.Since early 2017, the Department of Commerce, the FDIC, and the IRS have been conducting an ongoing investigation into the relationship between Caterpillar, Inc. and Caterpillar SARL (a Switzerland-based entity) relating to the tax years of 2007 through 2012. The IRS has proposed $2.3 billion in additional taxes and penalties related to the companies' transfer pricing practices. This matter has yet to be resolved. Caterpillar expects that the ultimate disposition of the matter will not have a material adverse effect on its consolidated financial position, liquidity or operating results.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe rating could be lowered if Moody's determined that Caterpillar's EBITA margins were on a trajectory to remain in the mid-single digits during a severe downturn in demand. The rating could also be lowered if there were a material erosion in Caterpillar's liquidity position or the portfolio quality of CFSC.The rating could be upgraded if the company is able to demonstrate better margin and return resiliency than in the past. Caterpillar's performance during past downturns has been poor, and one of the key objectives of its O&E model has been the establishment of operating disciplines that will allow it to generate stronger returns than in the past when demand falls sharply. An upgrade would be supported if the company can sustain its EBITA margin approaching 10% and can also generate free cash flow in the area of $1 billion to $2 billion in the face of a sales decline approximating 25%. The methodologies used in this rating were Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079, and Captive Finance Subsidiaries of Nonfinancial Corporations published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1183459. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies. Caterpillar Inc. (CAT), headquartered in Deerfield, Ill., is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. For the twelve months ended December 31, 2020, the company's ME&T operations generated approximately $39.0 billion of sales; operating profits and margins were $4.3 billion and 11.1%. CFSC provides a significant portion of the wholesale and retail financing for Caterpillar equipment, and it had $34.4 billion in total assets as of December 31, 2020.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Bruce Clark Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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