Outlook Stable
New York, April 10, 2015 -- Moody's Investors Service downgraded the senior unsecured debt rating
for General Electric Company (GE) to A1 from Aa3, along with all
other instrument ratings for GE as outlined below. The downgrades
follow GE's April 10th announcement of its plan to sell approximately
$200 billion of ending net investment in its wholly-owned
finance subsidiary, General Electric Capital Corporation (GE Capital),
and to amend its current income maintenance agreement such that GE will
now provide a full and unconditional guarantee of all existing GE Capital
debt (approximately $200 billion). The company's Prime-1
(P-1) short-term rating was affirmed. Separately,
GE Capital's A1 senior unsecured debt rating has also been affirmed,
based on the credit enhancement afforded by the provisioning of the aforementioned
explicit guarantee from GE. The rating outlook remains stable.
RATINGS RATIONALE
"The downgrades reflect our perception of a growing level of financial
risk tolerance, in favor of equity holders and at the expense of
creditors," said Russell Solomon, Senior Vice President and
Moody's lead analyst for General Electric. The pending GE Capital
asset sales, with virtually all benefits inuring to equity owners,
taken together with high share repurchase activity and a high dividend
payout in recent periods, and the liquidity-consuming Alstom
acquisition that is still pending, reflect a noteworthy shift by
GE to more aggressive financial policies, according to the rating
agency. "GE has been increasing cash payments to shareholders
for several years but has not yet achieved a commensurate increase in
operating earnings and cash flow," noted Solomon. The company
had previously stated that it would exercise a degree of restraint in
further increases in distributions to shareholders when it announced the
Alstom acquisition. "We view the updated plan to allocate a total
of about $90 billion to shareholder distributions over the next
three years as a decisive indication that the company's financial
policies have shifted to a more aggressive posture, which we expect
to continue going forward," added Solomon.
Sustaining the company's heavy distributions to equity holders while
also sustaining a credit profile that is consistent with the former rating
would require stronger growth in cash flow from operations than Moody's
expects over the medium term. "In fact, the reduction
of earnings and dividends from GE Capital during a period of heavy investment
by GE and under difficult market conditions for many of GE's industrial
business lines will further undercut financial ratios that we already
expected to be weaker than peers at the same rating level over the next
several years, although there is an acknowledged offset in reducing
the size of a much riskier portion of GE's total portfolio,"
said Solomon.
Moreover, the full and unconditional guarantee from GE of all existing
GE Capital debt imposes additional overhang relative to the current income
maintenance agreement and further exacerbates the declining leverage profile
that is already heavily strained by substantially underfunded pension
liabilities. The current cash consumptive stage of GE's business
cycle and ongoing heavy capital spend as anticipated will continue to
constrain the company's free cash flow generating capability and
earnings over the next few years.
The dramatic shrinkage of GE Capital down to a group of assets approximately
one-fifth of peak historical size and more closely aligned with
GE industrial business lines is itself a credit positive development,
notwithstanding the lower Moody's baseline credit assessment (BCA) for
GE Capital (baa2 vs baa1 previously). The lower BCA principally
reflects the much smaller (albeit still large) size and more concentrated
nature of the GE Capital assets, which will also have weaker profitability
measures and inherently more volatile earnings on a go-forward
basis than the much larger current GE Capital portfolio of assets.
Liquidity provisions for GE Capital have markedly improved since the financial
crisis, however, along with broader risk mitigation initiatives
which are expected to persist over the interim period, according
to Moody's. The corresponding reduction in the sheer size of GE
Capital's previously much larger wholesale funding risk exposure
(and the ensuing overhang for GE) is subsequently a noteworthy offsetting
credit enhancement for the industrial GE parent company.
The following summarizes Moody's rating actions:
Rating Downgrades:
..Issuer: General Electric Company
Long Term Issuer Rating, Downgraded to A1 from Aa3
Senior Unsecured domestic currency rating, Downgraded to
A1 from Aa3
Senior Unsecured Shelf domestic currency rating, Downgraded
to (P)A1 from (P)Aa3
Subordinated Shelf domestic currency rating, Downgraded
to (P)A2 from (P)A1
....Revenue Bonds Supported by General Electric
Company, Downgraded to A1 from Aa3
Rating Affirmation:
..Issuer: General Electric Company
Commercial Paper rating, Affirmed at P-1
....Revenue Bonds Supported by General Electric
Company, Affirmed at VMIG 1
....Revenue Bonds Supported by General Electric
Company, Affirmed at P-1
Outlook Action:
..Issuer: General Electric Company
Outlook, Stable (unchanged)
The stable rating outlook reflects Moody's expectation that GE and GE
Capital will successfully execute the planned multi-year shrinkage
of GE Capital, notwithstanding ongoing macroeconomic headwinds and
difficult market conditions in certain industrial business segments.
A consistent track record and a history of prudent management and strong
industry knowledge mitigate many of the perceived execution risks associated
with the transaction. The outlook also incorporates Moody's expectation
that GE's industrial operations will generate improving profitability
and cash flows over the next several years as the company more meaningfully
benefits from ongoing restructuring and heavy capital investment activities.
Ratings could be lowered if GE fails to successfully execute the planned
GE Capital asset sales and maintain strong excess liquidity and capital
provisions sufficient to mitigate funding risk over the next few years,
or if it fails to successfully integrate the pending Alstom asset acquisition
and realize expected synergies. Ratings could also be pressured
if GE experiences sustained deterioration in credit metrics, erosion
in the competitive strength and cash generating ability of its industrial
operations, and, more broadly, if the balance sheet
weakens further from additional debt-funded acquisitions and/or
the failure of GE Capital to repay principal and timely satisfy requisite
interest payments on its debt and other obligations. This could
be indicated by the following financial ratios: Moody's adjusted
Debt-to-EBITDA above 2.5x; EBITA-to-Interest
below 6.0x; Retained Cash Flow-to-Net Debt below
25% -- all on a sustained basis. Negative
rating action(s) could also be considered if GE Capital's credit
profile weakens due to material changes in profitability, liquidity
and leverage related to the monetization of its non-core assets,
or otherwise.
While not expected given GE's weakly positioned credit metrics on
both a current and proforma basis, coupled with Moody's view that
GE Capital's material targeted asset sales and the pending Alstom
acquisition effectively constrain the company's financial flexibility
at the current rating level, consideration for a positive outlook
or a higher rating longer-term could follow meaningful improvement
in the perceived credit risk of GE Capital and expectations of sustained
improvement in liquidity and key credit metrics for the broader GE industrial
credit. This could be evidenced by Moody's adjusted Debt-to-EBITDA
of 1.5x or lower, Retained Cash Flow-to-Net
Debt above 45%, and Free Cash Flow-to-Debt
of 25% or more -- again, all on a sustained
basis.
The methodologies used in these ratings were the Global Manufacturing Companies, published in July 2014, and The Rating Relationship Between Industrial Companies And Their Captive Finance Subsidiaries, published in May 2012. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Fairfield, Connecticut, General Electric
Company's industrial operations generated revenue approximating $108
billion in the twelve-month period ended December 2014.
The company is a global diversified conglomerate with heavy manufacturing
operations in seven broad reporting segments: Power & Water,
Aviation, Healthcare, Oil & Gas, Appliances &
Lighting (note that the Appliances segment disposition is pending and
is expected to be completed in the second half of 2015), Energy
Management and Transportation. GE also maintains a wholly-owned
finance subsidiary in Stamford, Connecticut-based General
Electric Capital Corporation (A1 stable), with about $43
billion of revenue generated 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 D 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 P 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
Moody's Downgrades GE's Senior Unsecured Debt Rating to A1
