Moody's comments on GECC strategic plans, affirms GE and GECC Aaa ratings
New York, December 02, 2008 -- Moody's Investors Service affirmed the Aaa long-term and
Prime-1 short-term ratings of General Electric Company (GE)
and General Electric Capital Corporation (GECC), following the announcement
by GE that it will undertake additional measures to strengthen GECC's
financial position. The ratings outlook for both companies is stable.
The affirmation and stable outlook embed Moody's expectations that:
(1) GE will be able to effectively execute its plan to downsize GECC's
scale and reduce its reliance on confidence-sensitive short-term
funding while maintaining solid earnings and asset quality; (2) GECC
will earn a minimum $5 billion in each of the next several years;
(3) General Electric Capital Services (GECS, parent of GECC) will
be able to restore its dividend payout to GE to historical levels by 2010;
(4) GE's industrial businesses will generate cash flow from operations
that exceeds $16 billion in 2010; (5) GE will continue to
suspend its share buyback until these expectations are realized;
and (6) the dividend stress on GE industrial will abate, either
through the resumption of more significant dividends from GECS to GE or
through the reduction of the GE external dividend. Should Moody's
determine that it is probable that GE and GECC will not achieve these
outcomes, the firms' long-term ratings could come under
pressure.
GECC Funding Profile
GECC has a significant reliance on wholesale debt markets to fund its
operating activities. This exposes it to capital market shocks
because of its large and continuous funding requirements. In recent
months, as credit markets have become disrupted, GECC's
liquidity profile has become more vulnerable. In response,
in October GECC announced the implementation of measures to bolster liquidity
and build capital levels in the face of severe stresses in the global
capital markets.
Today's announcement by GE strengthens certain aspects of its October
plan by: 1) targeting a further reduction of commercial paper balances
over the course of the next year (total CP will decline by nearly $40
billion); 2) improving committed bank line coverage of commercial
paper balances to at least 100% by the end of 2009; 3) diversifying
funding sources to include an increased percentage of funding from deposits
and other alternatives; and 4) further reducing the firm's
investment in riskier, debt-intensive assets such as residential
mortgages and commercial mortgages, thereby reducing overall leverage
and potential earnings volatility. Moody's expects these
changes in GECC's financial policies to be permanent and therefore
supportive of the firm's ratings.
Moody's commented that GECC's access to the U.S.
Federal Reserve's Commercial Paper Funding Facility (CPFF) and the
FDIC's Temporary Liquidity Guarantee Program (TLGP) is expected
to have a stabilizing effect on GECC's short-term liquidity
profile. GECC has capacity to issue up to $132 billion of
government guaranteed debt (including CP). These programs serve
as a bridge for GECC's short-term programs while the company
shifts its funding profile to be less reliant on commercial paper.
GECC's use of these government programs does not result in any benefit
to the firm's long-term ratings, due to their temporary
nature.
GECC Earnings Profile
GECC's record of predictable asset quality and earnings performance
has been -- and is expected to remain -- the basis for its ability
to maintain consistent market access. GECC will continue to be
significantly exposed to confidence sensitivity in the debt markets,
which is a constraint to its stand-alone credit profile.
Although global economic weakness will force GECC to contend with rising
credit losses during the next several quarters, Moody's expects
the effects of asset quality deterioration on its credit measures and
profitability will be limited. This is due to its continued strong
business execution, risk management, as well as asset and
geographic diversification.
To date -- and in contrast to many other financial institutions --
GECC has posted strong operating results. Return on average managed
assets measured an annualized 1.3% in the third quarter
of 2008, within the firm's historical range of 1.2%
to 1.9%. Net charge-offs registered 1.18%
of average finance receivables for the first nine months of 2008 --
weaker than the prior year, but overall still strong and within
its range over the last fifteen years, and well below the 2.0%
level registered in 1991. Although GECC has sizeable commercial
real estate (global) and residential real estate (all non-U.S.)
portfolios, Moody's believes credit deterioration should be
manageable, given these portfolios' reasonable loan-to-value,
granularity of property size, and low average exposures.
Furthermore, GECC is expected to maintain sufficient financial flexibility
to avoid being a forced seller of commercial real estate investments into
a weak market.
Moody's said that the stable ratings outlook assigned to GE and
GECC is contingent on GECC's continuing to report solid asset quality
metrics and earnings. Moody's expects GECC will generate
earnings in excess of $5 billion during 2009. Net charge-offs
are not expected to exceed the 2% peak level the firm recorded
in the early 1990's. Should the company's performance
indicate that it will be unable to meet these expectations, its
ratings and/or outlook could come under pressure in the absence of other
compensating adjustments. Moody's also notes that although
GECC is building capital levels its leverage is expected to remain high
versus other financial institutions. If leverage were to rise in
the future, this could also factor into a reassessment of the firm's
ratings and/or outlook.
Moody's also commented that the GECC ratings and outlook are equalized
with those of GE, based upon the strong support GE provides to GECC.
GE's support of GECC has been demonstrated by capital injections,
a fixed-charge maintenance support agreement, operating and
management support, a guarantee of certain subordinated debt,
and indemnifications GE provided to the FDIC associated with the TLGP.
Moody's expects that GE's continuing support of GECC is unwavering,
and this is critical to GECC's ratings.
Industrial Operations Cash Flow
GE's industrial operations continue to hold strong and defensible
competitive positions throughout its broad portfolio that have demonstrated
a long history of profitability and cash flow generation through economic
cycles.
Moody's expects that GE industrial's reported cash flow from
operations, including the dividend from GECS, will decline
in 2009 to approximately $16 billion from $20 billion for
the latest twelve months ended September 2008. The expected decline
is attributable to: (1) Moody's expectation that GECS net
income will decline in 2009 as a result of GE's plan to reduce the
size of its finance operations and incremental credit losses; (2)
the reduction of the dividend payout from GECS to GE from 40% to
10% of GECS' net income; and (3) a likely reduction
of progress payments received by GE as a result of the slowdown in infrastructure
orders worldwide.
Excluding the GECS dividend, industrial cash flow from operations
has increased steadily from $8.1 billion in 2002 to approximately
$16.5 billion for the latest twelve months ended September
2008. Given the weaker global economic conditions and notwithstanding
a likely stronger mix of higher margin services business versus lower
margin equipment sales over the near term, Moody's expects
GE industrial cash flow from operations in 2009 could decline by 5%
to 10%. This outcome would result in cash flow generation
between the levels achieved in 2006 and 2007 ($14 billion and $16
billion, respectively).
After incorporating capital expenditures that approximate $3 billion
annually and an estimated $13 billion of common dividends,
Moody's estimates that GE industrial's free cash flow could
be breakeven to slightly negative in 2009. This compares to an
average of $3 billion since 2002 (a low of $600 million
and a high of $6.4 billion). The driving force behind
the expected weaker free cash flow in 2009 is the reduced dividend from
GECS to GE and the increased external dividend following the company's
recent equity offering. While other highly rated companies have
from time-to-time recorded negative free cash flow in a
given year or two, this is not characteristic of an Aaa-rated
firm.
GE Share Buyback and Dividend Policy
The GE and GECC ratings and outlooks also incorporate Moody's view
that GE will maintain an appropriate balance between shareholder and creditor
interests in its financial policies. Moody's expects that
GE will continue to suspend its share buyback until the GECC plan is executed,
thus conserving cash. Moody's also stated that GE's
dividend has grown substantially over the course of the past few years
as GECS earnings have grown. However, reduced GECS earnings
expectations have not been accompanied by a lower external GE common dividend.
This has placed and will place an additional call on GE industrial's
cash flows. Moody's believes that this burden will need to
be reduced, driven by either the resumption of more significant
dividends from GECS to GE (while not impairing GECS's capital position)
or through the reduction of the GE external dividend. If the dividend
stress on GE industrial does not abate by 2010, the firms'
long-term ratings could face negative pressure.
On September 25, 2008, Moody's commented that GE's revised
operational and financial strategies for GECC were supportive of the Aaa
long term and Prime-1 short term ratings and stable outlook of
both GE and GECC.
The principal methodology used in rating GE is the Heavy Manufacturing
Methodology, and in rating GECC is Analyzing the Credit Risks of
Finance Companies, both of which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating these issuers can also
be found in the Credit Policy & Methodologies directory.
General Electric Company, headquartered in Fairfield, Connecticut,
is one of the largest diversified companies in the world, reporting
consolidated revenues of $185 billion for the twelve months ended
September 2008.
General Electric Capital Corporation, based in Stamford, Connecticut,
is the legal entity which holds GE's investments in the commercial and
consumer finance. For the nine months ended September 2008,
GECC reported net earnings of $6.8 billion.
New York
Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
