Markets

Ticking Financial Bombs at Caterpillar

By David Phillips

Updated on: November 6, 2008 / 2:30 PM EST / MoneyWatch

Jim Owens, Chairman and Chief Executive of Caterpillar, told analysts on the company's third-quarter 2008 earnings call he believes demand in emerging markets, especially for energy and mining equipment, should offset weaker construction spending in the U.S., Europe, and Japan. What he and other executives failed to mention on the call, however, is that the global leader of construction and mining equipment is making it easier for customers to access credit, according to its third-quarter 2008 FORM 10-Q regulatory filing:

We have guaranteed to repurchase loans of certain Caterpillar dealers from third-party lenders in the event of default. These guarantees arose in conjunction with Cat Financial's relationship with third-party dealers who sell Caterpillar equipment. These guarantees generally have one-year terms and are both secured and unsecured.
We provide loan guarantees to third-party lenders for financing associated with machinery purchased by customers. These guarantees have varying terms and are secured by the machinery. In addition, Cat Financial [Caterpillar Financial Services] participates in standby letters of credit issued to third parties on behalf of their customers. These standby letters of credit have varying terms and beneficiaries and are secured by customer assets.

The company said it currently does not anticipate any losses under any of its guarantees. Yet, Caterpillar guarantees rose year-on-year at quarter-end September 30 approximately 61 percent to $820 million. One may argue that this is immaterial, as management expects aggregate sales to top $50 billion by year-end 2008 -- unless you want to dig even deeper at the millions in other finance receivables the company offloads its balance sheet to special purpose entities (SPEs).

Remember mortgage-backed securities? SPEs are other improvised financial bombs waiting to explode, as the SEC debates expanding mark-to-market valuations to this asset class, too. [Readers looking for more information on the SPE issue should read Mark this to Market, by Debra Fiakas, CFA.]