PEORIA, ILLINOIS-BASED CATERPILLAR SHIP-ENGINE LOANS ARE A WEAK SPOT

PEORIA, ILLINOIS-BASED CATERPILLAR SHIP-ENGINE LOANS ARE A WEAK SPOT

Company Says European Buyers Account for Bulk of Problem; Financing Arm Is Healthy Overall

08/08/13, WSJ

Caterpillar Inc. CAT +0.66% has been forced to accept delayed payments or otherwise ease terms on many of the loans and leases it made to marine-engine customers in Europe.

The company blamed a glut of commercial vessels and low cargo rates resulting from Europe's sluggish economy, but said the market was "beginning to show slow signs of improvement."

In a securities filing last week, the heavy-equipment maker reported $436 million of "impaired" loans and leases in its power-systems segment, up 52% from a year earlier. Caterpillar said it classifies a loan or lease as impaired if it is probable that the company "will be unable to collect all amounts due according to the contractual terms of the loan or finance lease."

Jim Dugan, Caterpillar's chief spokesman, said that problem was concentrated among marine-engine customers in Europe and jts overall financing business remains healthy.

After booming from 2005 to 2008, global demand for ships has plunged, and shipyards are suffering from overcapacity. Orders have shown some sign of improving this year, said Natalie Burrows, an analyst at Clarksons Research Services Ltd. in London, but "we're still way below boom levels."

Europe's shipyards, outshone by Asian rivals in the market for giant tankers and container ships, tend to make small and midsize vessels, such as those carrying passengers or serving the offshore energy industry.

Caterpillar restructured $284 million of troubled debts for its customers last year, up 54% from a year earlier. Ten customers accounted for the bulk of those restructurings, Mr. Dugan said. The 10 customers were all buyers of Caterpillar's marine products, and eight of them were in Europe, he said.

Best known for its yellow construction machines, Caterpillar also makes engines used to generate electricity, drill for oil and gas, run industrial equipment and power trains and ships.

The company's marine-product line includes diesel engines and electricity generators for a wide variety ofvessels including yachts, ferries and cargo, container, cruise, dredging and fishing ships. Some of those products are sold under the MaK brand.

Steady engine sales have helped Caterpillar cope with slumping demand for construction and mining equipment.

In the second quarter, engines—or power systems, as the company calls them—accounted for 61% of Caterpillar's total operating profit.

Overall, Caterpillar said last month, its financing arm continues to "perform well." The company's allowance for credit losses was $422 million, or 1.46% of net finance receivables, as of June 30, compared with $393 million, or 1.47%, a year earlier.

In general, credit quality among U.S. equipment buyers appears to be strong. The Equipment Leasing and Finance Association reported last month that receivables more than 30 days late declined to 1.4% of the total in June from 2.4% a year earlier.

In a sign of progress, more of Caterpillar's power-systems loans and leases were being paid on time in the latest quarter. Loans and leases on which payments were 31 days or more overdue declined to $159 million from $292 million a year earlier. Mr. Dugan said some restructured loans remained classified as impaired until customers managed to keep up on payments for at least 12 months and resolved other issues.

Write to James R. Hagerty at bob.hagerty@wsj.com