S&P Lowers Outlook on Caterpillar (CAT), Caterpillar Financial to Negative; Notes End-Market Weakness
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S&P Global Ratings said that it has revised its outlook on Caterpillar Inc. (NYSE: CAT) and its wholly owned finance subsidiary, Caterpillar Financial Services Corp., to negative from stable.
At the same time, we affirmed all of our ratings on the company and its subsidiaries.
"The negative outlook reflects our expectation that the pressure in Caterpillar's end markets will persist into 2017," said S&P Global credit analyst Svetlana Olsha. "In addition, the outlook reflects the risk that the company's profitability may not begin to stabilize next year as there is limited cushion for any further deterioration in its credit measures over the next 12-24 months given the length of the current downturn." The company's end markets remain challenged due to persistently low commodity prices, which have led many of its customers to reduce their capital expenditures. Furthermore, CAT continues to face an oversupply of equipment in most of its markets, which has contributed to an increase in pricing pressure and will likely lead to a lag in the demand for Caterpillar's products even after its end markets begin to recover. We expect the company's FFO-to-debt ratio to drop to about 30% and its debt-to-EBITDA to increase to about 2.5x in 2016. Still, CAT's conservatively managed captive finance business--including its high quality portfolio of assets and relatively low leverage--continues to support our current financial risk profile assessment.
The negative outlook on Caterpillar reflects the risk that the company's credit measures could deteriorate beyond our expectations over the next 12-24 months if the weak market conditions persist longer than we expect and the company is unable to improve its profitability. We believe that CAT has very limited capacity for share repurchases or debt-funded acquisitions for the remainder of 2016 and in 2017, when we expect that the conditions in its markets will begin to stabilize.
We could lower our ratings on CAT if prolonged weakness in the company's end markets pressures its profitability and cash flow such that its FFO-to-debt ratio declines and remains below 30% over the next two years. We could also consider lowering our rating if the credit quality of the company's captive finance operation deteriorated, as indicated by deteriorating debt-to-equity or net loss ratios, causing us to reassess the quality of its portfolio.
We could revise our outlook on Caterpillar to stable if the company's operating performance stabilizes and we are reasonably sure that its operating conditions will begin to improve (driven by improvements in its end markets). For example, we could revise our outlook to stable if we expect CAT adjusted FFO-to-total debt ratio to comfortably exceed 30% for the next two years.
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