CAT Sells Bonds to Buy Bucyrus - Analyst Blog
25 Mai 2011 - 2:00PM
Zacks
Shortly after Caterpillar
Inc. (CAT) received its go–ahead from the U.S. Department
of Justice for the pending $8.6 billion buyout of Bucyrus
International Inc. (BUCY) , the company has sprung into
action by selling $4.5 billion bonds, its biggest ever corporate
debt sale on record.
Normally, Caterpillar sells bonds
through its unit Caterpillar Financial Services Corp., which offers
equipment financing and loans for customers and dealers.
Caterpillar has not issued debt at the parent-company level since
2008.
In November 2010, following the
company’s announcement of its intention to buy Bucyrus, it had
planned to fund a part of the $8.6 billion consideration by issuing
up to $2 billion in equity. Caterpillar has now scrapped the idea
of issuing equity and has sold $4.5 billion in bonds to fund the
same. The balance of the acquisition will be paid for with $800
million in commercial paper and $3.3 billion in cash on hand.
In December last year, Caterpillar
entered into a bridge loan agreement of up to $8.6 billion from
certain financial institutions led by JPMorgan Chase Bank, the
investment bank arm of JPMorgan Chase & Co.
(JPM), to fund the acquisition. Under the terms of agreement,
Caterpillar has the option to issue senior notes and/or equity in
lieu of all or a portion of the drawing under the Bridge Loan
Facility. The Notes in this offering are being issued in lieu of
Caterpillar’s drawing on the Bridge Loan Facility. The bridge
lender commitments will be reduced by the amount of bonds sold.
The 5-part issue will include
18-month and 2-year floating-rate note pieces and 3-, 10- and
30-year fixed-rate tranches. The 18-month floating-rate tranches
will be $500 million and the 2- and 3-year notes will be $750
apiece, while the 10- and 30-year pieces will be $1.25 billion
each.
The 18-month floater was launched
with a risk premium of 10 basis points over the 3-month London
Interbank Offered (LIBOR) rate while the 2-year was launched at 17
basis points over LIBOR. The 3-year piece was launched with a risk
premium of 50 basis points over Treasury bonds. The 10-year tranche
was launched at 85 basis points while the 30-year was launched at
98 basis points over Treasury bonds. Moody's assigned A2 ratings to
the debt.
As of March 31, 2011, Caterpillar
had a cash horde of $4.87 billion as of March 31, 2011. The company
has $19.9 billion of long-term debt maturing after one year.
Our Take
The Bucyrus acquisition will
position Caterpillar as the leading global mining original
equipment manufacturer and the combined product portfolio will
dwarf Joy Global Inc. (JOYG), the only
other manufacturer of surface and underground mining equipment in
the US. Needless to say, Caterpillar’s strong brand name, pricing
power and global dealer network place it in an advantageous
position to exploit the growing need for infrastructure development
worldwide. The shares of Caterpillar presently retain a Zacks #1
Rank (short-term Strong Buy recommendation) on the stock.
Peoria, Illinois-based Caterpillar
Inc. is the manufacturer of construction and mining equipment,
diesel and natural gas engines, and industrial gas turbines. The
company is one of the few leading U.S. companies in an industry
that competes globally from a principally domestic manufacturing
base. Caterpillar operates three divisions – Machines, Engines and
Financial Products. Caterpillar competes with the likes
of CNH Global
NV (CNH), Komatsu
Ltd. (KMTUY) and Volvo
AB (VOLVY).
BUCYRUS INTL A (BUCY): Free Stock Analysis Report
CATERPILLAR INC (CAT): Free Stock Analysis Report
CNH GLOBAL NV (CNH): Free Stock Analysis Report
JOY GLOBAL INC (JOYG): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
VOLVO AB ADR B (VOLVY): Free Stock Analysis Report
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