Caterpillar looks to fund growth in China
Struggling to complete orders in time, the heavy equipment manufacturer is issuing its third dim sum bond offering.
The company has gathered a huge backlog and is struggling to raise capacity and complete orders in time, necessitating further investments in this market. This is especially exaggerated for mining equipment. Caterpillar said it won't be able to deliver on some orders for large mining trucks until 2014.
The demand in emerging economies for construction and mining equipment, coupled with the rebuilding efforts on in Japan after the devastating earthquake, has kept the company working at full capacity, and this is expected to continue for quite some time now.
Caterpillar is focusing on China as its primary market given its size and growth potential. It expects the inland China's infrastructure to start developing at the same pace as the coastal regions, thus driving demand for its products. Construction and machinery are the most important business line for Caterpillar, accounting for nearly 59% of its stock value.
CAT issued its first dim sum bond in November 2010, months after Chinese government relaxed its rules for yuan circulation in Hong Kong. It helped the company raise CNY 1 billion at 2% yield rate and a maturity of two years. The second offering was made by the company in July last year.
This time, the company raised CNY 2.3 billion by issuing two year maturity bonds with a yield of 1.35%. The dim sum bond market was believed to be dead as there were concerns that the yuan remained undervalued. However, Caterpillar's successful issue and the higher yield it offers compared to previous occasions shows that the investors are ready to selectively participate in this market amidst concerns that yuan wont appreciate as quickly as before. This bond offering was done by the financial unit of Caterpillar, called Caterpillar Financial Services Corp.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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