Increasing signs of stress at the finance arm of General Electric Co. has triggered some concerns about other companies with in-house lending units and their ability to weather the financial crisis.
But the consensus among analysts as companies such as Caterpillar and Harley-Davidson prepare to report earnings is they are less at risk for the kind of big, finance-driven disappointment GE recently delivered -- although financing their businesses will be more difficult and costly going forward.
One reason for the optimism comes from their modest size. Unlike GE, where financial services accounted for nearly half of all profits in 2007, the lending units at Caterpillar and Harley and diversified manufacturer Textron Inc account for 15 percent -- or less -- of the parent's bottom lines.
Another difference: Unlike GE's finance unit, which has dabbled in everything from subprime mortgages to private label credit cards, the lending operations at Harley-Davidson and Caterpillar stay pretty close to home, providing inventory financing for dealers or purchase financing for customers.
"It's a totally different animal," Eli Lustgarten, an analyst at Longbow Research, said of Caterpillar's finance arm. "They stick to their knitting, their loans are highly collateralized, their default rates are relatively low and there's a good auction market" if the equipment needs to be repossessed and sold.
CAT'S HIGHER STAKES
An even more critical indicator will come next Tuesday, when Caterpillar, the world's largest maker of heavy construction and mining equipment, releases its latest results.
With Caterpillar, the stakes are higher. Its in-house lending unit, known as Caterpillar Financial Services Corp, is much larger than Harley's -- and active in many more parts of the world. In 2007, Cat Financial's pretax profit was $728 million -- about 15 percent of the consolidated pretax profit of $4.95 billion reported by the parent company.
In a recent interview with Reuters, Jim Owens, Caterpillar's CEO, insisted the unit was conservatively run and would weather the current turmoil.
"We're pretty solid, old-fashioned lenders, loaning to people we know, getting a down payment, knowing how to remarket" any repossessed equipment, he said.
CUSTOMER LOANS
The claim seems to stand up to scrutiny. According to the unit's annual report, fully 63 percent of the loans in Cat Financial's portfolio in 2007 were used to finance customer purchases of equipment, either through installment sales contracts or leases.
Another 18 percent went to finance dealers and 1 percent went to finance government purchases of Caterpillar equipment.
In fact, the only part of the business that seems remotely more complicated than that is the 18 percent of Cat Financial's portfolio characterized as "customer loans."
The reason? Those loans may be used, for instance, to buy a tugboat that has only a piece of Caterpillar equipment on it. In other cases, the loans may represent money borrowed by an existing Caterpillar customer that is used as working capital -- not to buy new equipment.
But even here, Caterpillar insists the business is not terribly risky because the loans are always secured by unencumbered collateral.
Analysts agree -- for now.
"While there's not great transparency in any of these finance arms, I think there's a lot more with theirs," said John Kearney, an analyst at Morningstar, in reference to Cat Financial.
Losses on loans at Caterpillar and Deere & Co, the farm equipment giant that also has an in-house finance arm, are well below where they have been historically, Kearney says, adding to his confidence they will avoid a GE-like humbling.
"They have deep long-standing relationships with the people they lend to -- the dealers and big customers -- and have a real feel for their credit profile," Kearney said. "So I think you'll just see fewer surprises there."
A spokesman for Caterpillar, citing the company's pending earnings, declined to comment for this article.
A spokesman for Harley did not respond to a request for comment.
But the consensus among analysts as companies such as Caterpillar and Harley-Davidson prepare to report earnings is they are less at risk for the kind of big, finance-driven disappointment GE recently delivered -- although financing their businesses will be more difficult and costly going forward.
One reason for the optimism comes from their modest size. Unlike GE, where financial services accounted for nearly half of all profits in 2007, the lending units at Caterpillar and Harley and diversified manufacturer Textron Inc account for 15 percent -- or less -- of the parent's bottom lines.
Another difference: Unlike GE's finance unit, which has dabbled in everything from subprime mortgages to private label credit cards, the lending operations at Harley-Davidson and Caterpillar stay pretty close to home, providing inventory financing for dealers or purchase financing for customers.
"It's a totally different animal," Eli Lustgarten, an analyst at Longbow Research, said of Caterpillar's finance arm. "They stick to their knitting, their loans are highly collateralized, their default rates are relatively low and there's a good auction market" if the equipment needs to be repossessed and sold.
CAT'S HIGHER STAKES
An even more critical indicator will come next Tuesday, when Caterpillar, the world's largest maker of heavy construction and mining equipment, releases its latest results.
With Caterpillar, the stakes are higher. Its in-house lending unit, known as Caterpillar Financial Services Corp, is much larger than Harley's -- and active in many more parts of the world. In 2007, Cat Financial's pretax profit was $728 million -- about 15 percent of the consolidated pretax profit of $4.95 billion reported by the parent company.
In a recent interview with Reuters, Jim Owens, Caterpillar's CEO, insisted the unit was conservatively run and would weather the current turmoil.
"We're pretty solid, old-fashioned lenders, loaning to people we know, getting a down payment, knowing how to remarket" any repossessed equipment, he said.
CUSTOMER LOANS
The claim seems to stand up to scrutiny. According to the unit's annual report, fully 63 percent of the loans in Cat Financial's portfolio in 2007 were used to finance customer purchases of equipment, either through installment sales contracts or leases.
Another 18 percent went to finance dealers and 1 percent went to finance government purchases of Caterpillar equipment.
In fact, the only part of the business that seems remotely more complicated than that is the 18 percent of Cat Financial's portfolio characterized as "customer loans."
The reason? Those loans may be used, for instance, to buy a tugboat that has only a piece of Caterpillar equipment on it. In other cases, the loans may represent money borrowed by an existing Caterpillar customer that is used as working capital -- not to buy new equipment.
But even here, Caterpillar insists the business is not terribly risky because the loans are always secured by unencumbered collateral.
Analysts agree -- for now.
"While there's not great transparency in any of these finance arms, I think there's a lot more with theirs," said John Kearney, an analyst at Morningstar, in reference to Cat Financial.
Losses on loans at Caterpillar and Deere & Co, the farm equipment giant that also has an in-house finance arm, are well below where they have been historically, Kearney says, adding to his confidence they will avoid a GE-like humbling.
"They have deep long-standing relationships with the people they lend to -- the dealers and big customers -- and have a real feel for their credit profile," Kearney said. "So I think you'll just see fewer surprises there."
A spokesman for Caterpillar, citing the company's pending earnings, declined to comment for this article.
A spokesman for Harley did not respond to a request for comment.
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