Caterpillar Inc’s (CAT) subsidiary Caterpillar Financial Services Corporation has issued a two-year RMB 1billion ($150 million) bond with a coupon rate of 2% to institutional investors in Hong Kong. This makes the company the first foreign industrial multinational and the second non-financial multinational company to issue debt in Chinese currency. Caterpillar plans to use the proceeds to fund its operations in China.
Caterpillar follows McDonald’s Corp. (MCD), which in August raised RMB 200 million ($29 million) through the sale of 3% notes due in September 2013. This was the first yuan bond sale of a non-financial multinational company in Hong Kong.
Earlier the issuance of the renminbi-denominated bonds (also known as “dim sum” bonds) in Hong Kong was restricted to Chinese financial institutions. However, in February, China removed such restrictions, allowing foreign companies to issue such bonds in Hong Kong to promote the use of Chinese currency for global commerce and reduce China’s reliance on the U.S dollar. This enables any company to tap the growing dim sum markets, but subject to an approval from Beijing.
Strong international demand for such yuan-denominated products is being fuelled by expectations that the currency will appreciate, and foreign investors that invest in yuan debt sold in Hong Kong can avoid the strict capital controls in mainland China. Earlier this week, China announced it would issue yuan-denominated government bonds worth RMB 8 billion ($1.2 billion) in Hong Kong as Beijing tries to internationalize its currency. The previous issue was of RMB 6 billion in September last year.
China surpassed Japan in the second quarter to become the world’s second largest economy behind the United States. This year, even though growth has begun to moderate slightly, China’s economy is projected to expand by about 10%, continuing a remarkable three-decade streak of double-digit growth. This has led companies around the world to eye China as a viable expansion option.
Caterpillar has to-date remained focused on building as well as enhancing its facilities in China as part of its strategy to expand in emerging markets to meet its long-term goals. Recently, Caterpillar announced its largest facility investment to date in China of $300 million, to build a state-of-the-art manufacturing facility in Tianjin, China to manufacture the industry leading 3500 series engines.
Previously, the company had announced plans to build a new facility in Wujiang, China, to produce mini-hydraulic excavator models for China, the world’s largest market for excavators in the below 8-ton class and expand its excavator facility in Xuzhou, China.
Caterpillar’s competitor, Terex Corp. (TEX), also remains focused on expanding in China. In August, Terex acquired a 65% control of privately held, Jinan-based crane maker Shandong Topower Heavy Machinery Company and entered into a joint venture agreement with Fujian South Highway Machinery Company to establish a mobile materials processing equipment manufacturing in Quanzhou, China.
Caterpillar currently retains a Zacks #1 Rank (short-term Strong Buy recommendation). We maintain our ‘Outperform’ recommendation on the stock.
Peoria, Illinois-based Caterpillar is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Caterpillar is one of the few leading U.S. companies in an industry that competes globally with a principally domestic manufacturing base. The company operates three divisions –– Machines, Engines and Financial Products.
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