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Rating Action:

Moody's Affirms GE Ratings Following Announcement of Baker Hughes Venture

31 Oct 2016

Increased Exposure in Oil & Gas is Initially Credit Negative but will Pay Out over Extended Time Horizon

New York, October 31, 2016 -- Moody's Investors Service affirmed its ratings for General Electric Company (GE) -- including the company's A1 senior unsecured debt and Prime-1 short-term commercial paper ratings -- following the announcement of a proposed transaction with Baker Hughes. The rating outlook remains stable. Separately, the ratings and outlook for GE's finance company subsidiary, GE Capital Global Holdings, LLC (GE Capital), are unaffected by the announcement and remain unchanged.

"GE and Baker Hughes are bringing together mostly distinct yet complementary assets that will result in an industry leading integrated oil field equipment and services company," said Russell Solomon, Senior Vice President and Moody's lead analyst for General Electric Company. Moreover, the development is broadly in line with Moody's prior expectations for the company's capital deployment and industrialization strategies. The new publicly traded integrated oil & gas company will be considerably stronger and better positioned for the coming recovery in oil & gas end markets than either company otherwise would be on a stand-alone basis, according to the rating agency.

However, "the development is initially credit negative for the remaining GE industrial company, given the leveraging impact of the incremental debt funding and concurrent loss of the earnings stream from GE's previously wholly-owned oil & gas business," noted Solomon. Moody's said that, from a credit perspective, GE will not immediately benefit from its ownership in the larger entity. Rather, Moody's estimates that it will take a couple of years from the closing date of the proposed transaction -- currently estimated to occur around mid-2017 -- before the net cash flow impact will be accretive to GE, following an initial period of one-time restructuring and integration costs, and an expected improvement in the operating environment. "The transaction should boost the cash flow profile of GE over the intermediate term, nonetheless, as GE benefits from improving end markets for both its own and Baker Hughes' business, as well as synergies related to initial cost-cutting initiatives and cross-selling of products and services," said Solomon.

Moody's cautioned investors that the transaction comes at a time of ongoing heavy investment activity in GE's remaining core industrial businesses. Coupled with a heightened competitive environment and persistent macroeconomic volatility, the company's cash generating capability will remain somewhat constrained over the interim period. In particular, GE's high dividend payout and upcoming capital calls -- requisite pension contributions and the Alstom put -- leaves the company somewhat capital constrained 2017-19, in Moody's estimation.

"The level of underlying financial flexibility available to GE -- at current rating levels -- will be materially constrained for some time in consideration of a weak forward free cash flow profile and rising financial leverage, two sizeable and nearly concurrent acquisitions, material shrinkage and loss of the dividend income stream from GE Capital, and increasingly aggressive shareholder return initiatives while macroeconomic conditions remain relatively weak and highly volatile," added Solomon.

Nonetheless, affirmation of GE's ratings reflects Moody's view that the long-term strategic benefits of the transaction are sufficiently compelling to mitigate the near-term weakening of the GE's industrial credit profile.

The following rating actions were taken:

Outlook Actions:

..Issuer: General Electric Company

....Outlook, Remains Stable

Affirmations:

..Issuer: General Electric Company

.... Commercial Paper (Local Currency), Affirmed P-1

.... Issuer Rating, Affirmed A1

....Preferred Shelf (Local Currency), Affirmed (P)A3

....Subordinate Shelf (Local Currency), Affirmed (P)A2

....Senior Unsecured Shelf (Local Currency), Affirmed (P)A1

....Pref. Stock Non-cumulative Preferred Stock (Local Currency), Affirmed A3

....Senior Unsecured Commercial Paper (Foreign Currency), Affirmed P-1

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1

RATINGS RATIONALE

The A1 senior unsecured debt rating for GE continues to reflect the large size and strong competitive position of the company's industrial businesses across a broad range of products and services, and our expectation that these activities will generate robust and durable levels of profitability and free cash flow through various business cycles. The long-term stability and relative predictability of revenues and cash flows are evidenced by GE's $319 billion industrial backlog, a significant component of which is for higher margin aftermarket services that provide an important level of support during periods of economic weakness. Over time, operating performance is expected to improve as restructuring and portfolio shaping initiatives yield further gains, macroeconomic conditions slowly recover, and the benefits of digitalization further enhance the company's service businesses.

However, credit metrics remain comparatively weak relative to many similarly rated peers, and are expected to deteriorate further immediately following the Baker Hughes transaction given the incremental (partial) debt funding and lost earnings following the GE oil & gas asset contribution. Moody's expects only modestly positive free cash flow for the industrial company over the next 12-18 months. GE has a substantial pension deficit (estimated at more than $33 billion if marked-to-market today) that continues to adversely impact an already elevated financial leverage profile. When combined with Moody's standard off-balance-sheet lease adjustment to fully reflect the company's principal debt and debt-like claims, effective leverage almost doubles (to 2.3x on a Moody's-adjusted Debt-to-EBITDA basis; about 0.3x higher inclusive of the aforementioned rise in pension funding shortfall) relative to funded debt levels. GE's assumption and guarantee of former GE Capital debt (about $70 billion and $55 billion remaining, respectively) represent material incremental obligations of a direct and contingent nature, as well. A reduced but still robust liquidity profile following last year's heavily cash-funded $10 billion acquisition of Alstom's power and grid assets (and other assets more recently), along with a noteworthy shift to more aggressive shareholder return initiatives (exacerbated by activist shareholders), underpins Moody's expectation of rising financial risk. And while markedly reduced in size and related exposure, GE's finance company operations are still quite large, and are actually somewhat riskier in that they are now more concentrated and subject to greater earnings volatility, with notably limited capacity for dividends, according to the rating agency.

RATINGS OUTLOOK

The stable ratings outlook reflects Moody's expectation that management will successfully complete the various ongoing restructuring and industrialization initiatives over the next 2-3 years, with noteworthy improvements in financial performance anticipated thereafter. In particular, the A1 senior unsecured debt rating for GE incorporates Moody's expectation of enhanced earnings, return and profitability measures, and free cash flows such that the company will be able to effectively and comfortably manage through global economic cycles while consistently maintaining a strong financial profile. This is notwithstanding ongoing macroeconomic headwinds and difficult market conditions in certain business segments, and assumes that the balance sheet will not be further weakened with a more onerous financial burden on the company's remaining assets.

WHAT COULD CHANGE THE RATINGS -- DOWN

Ratings could be lowered if GE fails to maintain strong liquidity and capital provisions sufficient to mitigate funding risk, if it is unable to successfully integrate the acquired Alstom and Baker Hughes assets and realize targeted synergies, or if it sustains a deterioration in credit metrics or an erosion in competitive strength and cash generating capability in core industrial operations. Additional actions that could prompt a negative rating action include further balance sheet weakening from incremental debt-funded acquisitions of size, share repurchases and/or the failure of GE Capital to repay principal and timely satisfy requisite interest payments on its debt and other obligations. Indicative ratios for GE's industrial business that might pressure ratings include the following: Moody's-adjusted Debt-to-EBITDA > 2.5x on a sustained basis, EBITA-to-Interest < 6x, Retained Cash Flow-to-Net Debt < 25%. A weakening of GE Capital's credit profile due to material changes in profitability, liquidity and/or leverage could also result in a negative rating action.

WHAT COULD CHANGE THE RATINGS -- UP

Moody's does not expect an upgrade of GE's ratings over the forward rating horizon. However, material improvement in the macroeconomic environment that translates into more robust earnings and cash flow streams, improved asset returns, and meaningful balance sheet strengthening could prompt consideration of potentially higher ratings. Indicative ratios for GE's industrial business that might warrant such consideration including the following: Moody's Adjusted Debt-to-EBITDA < 1.5x, Retained Cash Flow-to-Net Debt > 45%, and Free Cash Flow-to-Debt > 25%. Such improvements in key credit metrics would have to be both sustainable and accompanied by an excellent liquidity profile, including a reduction in the perceived credit risk of GE Capital, in order to support prospectively higher ratings.

For additional information, subscribers to Moody's research service are directed to its website at www.moodys.com.

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Boston, Massachusetts, General Electric's industrial operations generated about $114 billion of revenue over the twelve-month period ended June 2016. The company is a global diversified conglomerate with heavy manufacturing operations in seven broad reporting segments: Power, Renewable Energy, Oil & Gas, Energy Connections & Lighting, Aviation, Healthcare, and Transportation. GE also maintains a wholly-owned finance subsidiary in Norwalk, Connecticut-based GE Capital Global Holdings, LLC (A1 stable), which generated about $7 billion of revenue over the same period.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Russell Solomon
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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