The overhang of the sovereign credit crisis in Europe isn't enough to derail the U.S. bond market as Caterpillar (CAT) issues debt tranches across the yield curve at attractive spreads. The issuance is to pay for its $8.6 billion acquisition of Bucyrus (BUCY) and this deal demonstrates that the debt markets are comfortable with financing global growth.
A total of 5 tranches of debt were issued totaling $4.5 Billion; 2 floating rate notes totaling $1.25 Billion with interest payable quarterly and 3 fixed rate notes totaling $3.25 Billion with interest payable semi annually. The notes offering was run by joint active bookrunners JP Morgan, RBS, and Barclays. The notes are rated Investment Grade (IG) by the three rating agencies and the terms are as follows:
Amount Coupon Yield* Spead / Treasury (bps) CDX IG (bps) Tranche 1 $500 MLN 10 bps + 3mo LIBOR 0.355% Tranche 2 $750 MLN 17 bps + 3mo LIBOR 0.425% Tranche 3 $750 MLN 1.375% 1.401% 50 50 Tranche 4 $1.25 BLN 3.900% 3.957% 85 122 Tranche 5 $1.25 BLN 5.214% 5.214% 98
CDX IG index source: Goldman Sachs Credit Strategy Research
Spead / Treasury (bps)
CDX IG (bps)
10 bps + 3mo LIBOR
17 bps + 3mo LIBOR
Yield for variable notes assumes LIBOR remains constant until maturity
3 month LIBOR currently @ 0.255%
In comparison to the term structure of the CDX IG index, the pricing of the notes are quite attractive, especially on the long end of the curve. The CDX IG index has data only up to 10 years; however the spreads on both the 10 year note and 30 year note are well below the spread on the 10 year index. Assuming that the fixed portion of the notes offering stays constant, the weighted interest rate and duration will be 4.571%, maturing in 12 years and 4 months.
Caterpillar has great potential for a solid investment as it has delivered nine consecutive positive earnings surprises, with the last one delivered on April 29 consisting of a 40% surprise on better than expected revenue. The company took the time to announce an upward revision in guidance saying "the outlook for 2011 has improved" and "positive about the short-term U.S. Economic outlook."
Fitch rating agency had the following to say when rating the recent notes offering as investment grade: "The ratings incorporate CAT's strong competitive position, solid operating performance, diversified customer base, global manufacturing footprint, an established and well capitalized independent dealer network, and strong free cash flow." The Japanese earthquake has cast a spotlight on the importance of having a robust global manufacturing footprint.
CAT's EBITDA margin increased to 13.4% in 2010 from 6.9% in 2009 and 11.1% in 2008. Fitch estimates the enterprise value of CAT to be 10x EBITDA in 2010 and 11x estimated EBITDA in 2011. Although the lofty valuation warrants some concern, this should be mitigated by the secular and cyclical growth from Bucyrus' products and services. In the end a premium should be justified as this is a company with solid footing in the global growth sector that is firing on all cylinders.
CAT's chart is impressive, especially from the point in which the 50 DMA crossed the 200 DMA. Since then, every time CAT tries to correct it basically trades sideways. This is not much of a correction. Indeed, investors who sell into strength usually have to get back into the stock at the same or higher price. Of course this was true until recently when the sovereign debt credit crisis was able to rock the markets and temporarily caused investors to doubt the global growth story. This resulted in a weakening of CAT's chart, allowing an entry point for savvy investors who have been patiently waiting to either start or add to their position. The RSI is quickly approaching the midpoint and the MACD is negative. Each time the MACD has turned negative during the last two years it has resulted in a good entry point into the stock. Patient investors may want to see the MACD begin to rise again as confirmation before piling into the stock, although I don't believe CAT will trade much below $95 in the near future.
With the all clear from the U.S. Department of Justice and the financing in place for the Bucyrus acquisition, Caterpillar appears well prepared to fulfill its global growth strategy.