China eats up Caterpillar bonds

November 24, 2010, 8:13 PM UTC

Caterpillar is plowing a furrow in what is shaping up as one of the investment world’s most fertile fields: The Chinese local-currency bond market.

The Peoria, Ill., tractor maker said Wednesday its finance arm sold 1 billion renminbi ($150 million) worth of medium term notes to institutional investors in Hong Kong.

Very hungry for Caterpillar

Caterpillar (CAT), like many other big multinational companies, has been intent on expanding its sales to the world’s fastest-growing big economy. It says selling bonds denominated in renminbi will allow it to match its Chinese assets with local liabilities.

“Our ongoing strategy is to fund our international country operations through the local capital markets wherever possible, and this transaction helps to further expand the diversified global funding platform supporting our international business,” said Caterpillar Financial’s Kent Adams.

Machinery sales in Caterpillar’s Asia/Pacific region surged 81% from a year ago in the third quarter to $1.8 billion. The company doesn’t break out sales by country, but it said in its most recent quarterly filing with regulators that “China had a large increase in sales volume, benefiting from more than 9% growth in the economy and 18% credit growth.”

Investors were so eager to buy into the company’s global growth story that Caterpillar was able to pay just 2% on the notes. Caterpillar shares have surged 45% this year (see chart, right) on sentiment that big U.S. multinationals provide the best means for cashing in on economic growth prospects in developing countries like Brazil, Russia, India and China, known collectively as the BRICs.

The rally has brought Caterpillar shares within a few dollars of their 2007 all-time high of $87.

Caterpillar’s offering isn’t the first by a big U.S. company, following on the heels of this summer’s 200 million renminbi sale by McDonald’s (MCD). But the Caterpillar deal is five times as large and is priced a full percentage point lower.

Wednesday’s sale also comes as the Chinese government has been trying to open up the market for yuan-denominated debt to expand international use of its currency. China said this week it would sell 8 billion renminbi ($1.2 billion) of debt in Hong Kong in its second bond sale in the Asian financial capital.

U.S. companies aren’t the only ones testing the Hong Kong bond market. Russian steel company Rusal is reportedly moving toward a debt sale as well.

Caterpillar says 7,400 of its 102,336 workers are in China. Its shares rose 2% early Wednesday to $83.64.