| CHICAGO, Sept 26
CHICAGO, Sept 26 When a unit of giant
manufacturer Caterpillar Inc (CAT.N) went to Wall Street this
week looking to borrow $1.25 billion as part of its normal
financing operations, there were lots of reasons to expect the
exercise would be anything but normal.
In the end, the capital raise wasn't as bruising or costly
as it could have been given the shattered state of the U.S.
banking system -- though it did illustrate how much the
financial world has changed in the space of a few weeks as a
result of the ongoing crisis.
Things didn't look propitious as Caterpillar Financial, the
company's captive finance arm, entered the market. As one after
another of Wall Street's biggest names fell in recent weeks,
banks began hoarding cash and investors, unsure who the next
victim would be, went on strike.
As these key players exited the corporate debt market, the
lending pipeline narrowed dramatically. Things got so tight at
one point last week, according to Caterpillar's chair and chief
executive, that all lending -- even to the highest-rated
corporate borrowers -- ground to a halt.
"For a day or two, all markets for medium-term notes were
closed to anybody," Jim Owens told Reuters on Monday in an
exclusive interview at a trade show in Las Vegas.
When Caterpillar entered the market on Tuesday, it was the
first major issuer to retest the waters. A lot of people were
watching -- and holding their breath.
To no one's surprise, the interest rates Caterpillar
Financial was asked to pay were higher -- a lot higher. When
the dust cleared, lenders had forced the company, a unit of the
world's largest maker of construction and mining equipment, to
pay about $15.6 million more per year to borrow the final
amount than Caterpillar would have paid on the same loan just a
A number of analysts expressed shock at the premium the
blue-chip company, untainted by the financial scandal, was
forced to pay.
"This is very disturbing because Caterpillar is an
industrial company, unsullied by association with the credit
crunch," said John Jansen, a former bond trader with the Open
Market Desk of the Federal Reserve Bank of New York who now
authors the "Across the Curve" bond market blog.
"If it takes that much concession to sell a solid stable
industrial, what might the outcome be when a large financial
seeks to tap the market?"
To be sure, $15.6 million isn't pocket change. But for
Caterpillar -- which expects to shell out an extra $550 million
to $650 million this year just to keep pace with higher steel
and other material costs -- the $15.6 million it paid to access
the credit markets during their worst week since the Great
Depression looks like a bargain.
As he reflected on this week's deal, Eli Lustgarten, an
analyst at Longbow Research, chose to accentuate the positive.
"Everyone is nervous," he said, "and in a nervous
environment, the price of credit is going to go up. And that's
what you see with the Caterpillar transaction. But the key
thing is, they got it done."
Caterpillar had good reason to be happy with the terms.
When it came to market this week, the company originally wanted
to raise about $500 million of the $1.25 billion total using
10-year notes. Lenders were happy to oblige -- but demanded the
company pay a premium of 325 basis points over the comparable
A year ago, those same lenders only asked for a 130 basis
point premium over the 10-year Treasury. So Caterpillar's
borrowing costs had spiked 195 basis points.
But during that same period of time, the average premium
that A-rated corporate borrowers have been required to pony up
has jumped 331 basis points, according to the Merrill Lynch
U.S. Domestic Master A-Rated Index, a benchmark for corporate
The Peoria, Illinois-based company declined to comment on
this week's debt offering. "Our standard practice is to not
discuss the strategic reasons for a particular issuance or the
decisions involved in the exact timing of any issuance," it
said in a statement.
But actions speak louder than words. Caterpillar liked the
rates it was offered on the 10-year notes so much that it
decided to borrow an additional $50 million, bringing the debt
sale total to $1.3 billion.
"Is the credit crisis preventing companies from doing
business? Is the crisis spreading from Wall Street to Main
Street?" said Lustgarten.
"The answer is yes, the markets are showing some signs of
worry. But they're still functioning."
(Editing by Gerald E. McCormick)