DBRS Limited (DBRS Morningstar) confirmed the long-term ratings of Caterpillar Inc. (Caterpillar or the Company) and its subsidiaries Caterpillar Financial Services Corporation and Caterpillar Financial Services Limited at "A" and the Commercial Paper rating of Caterpillar Financial Services Limited at R-1 (low). All trends are Stable. The Company's solid business profile continues to be the primary factor supporting the current ratings. Furthermore, Caterpillar's financial profile has sufficient cushion to absorb an expected deterioration in its operating results brought on by the disruption caused by the Coronavirus Disease (COVID-19) pandemic to still remain compatible with the current ratings. Hence, DBRS Morningstar expects the Company's ratings to remain stable in the near future.
Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. The Company's broad range of innovative products and diverse end markets (by geographic region and industry) further enhance its competitiveness. The Company's finance subsidiary and worldwide independent dealer network also serve to broaden and strengthen customer relationships. These strengths underpin and sustain the Company's solid business profile.
Caterpillar reported modestly lower operating results in 2019 compared with 2018, the latter of which was a record year. Nevertheless, profitability was still above historical levels, and all key credit metrics were at the high end of the rating range. The advent of the coronavirus in early 2020 and actions taken by various governments to control the spread of the virus, such as shutting down factories, restricting commerce, and implementing social distancing measures, led to a sharp decline in economic activities. DBRS Morningstar expects the disruptions caused by the coronavirus to lead to a recession in most regions in the world. Because Caterpillar is highly sensitive to business conditions in the industries and regions that it serves, DBRS Morningstar anticipates that Caterpillar would suffer a material deterioration in its operating performance. Caterpillar reported a sharp decline in operating results in Q1 2020 and expects results in Q2 2020 to be even worse.
DBRS Morningstar, in its base-case scenario, assumed that in 2020 the U.S., Caterpillar's largest market, would suffer a 3.5% decline in its GDP and that the major economies in Western Europe would experience a modestly bigger decline in GDP than the U.S. but that both regions would stage a recovery of about 3.0% GDP growth in 2021. DBRS Morningstar estimates that sales at Caterpillar's industrial businesses would drop about 30% (year over year) in 2020 and rise about 25% in 2021 and the EBITDA margins (as defined by DBRS Morningstar) in 2020 and 2021 would be modestly above those achieved during the last downturn in 2016 and 2017, respectively. Consequently, DBRS Morningstar anticipates that Caterpillar's operating performance and associated key credit metrics would weaken materially in 2020 and stage a meaningful, but not full, recovery in 2021. Under this scenario, the Company's financial risk profile would remain within the current rating range, supporting a stable outlook for the ratings.
However, there are material uncertainties regarding the duration of the pandemic and the severity of its economic impact. In the event that the deterioration in Caterpillar's financial profile is worse than anticipated in the base case for an extended period, DBRS Morningstar will consider taking negative rating actions. DBRS Morningstar does not expect to take any positive rating actions in the near future due to the significant uncertainties facing the Company.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.
The principal methodology is Rating Companies in the Industrial Products Industry (February 5, 2020). Other applicable methodologies include DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020); DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019); and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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