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Rating Action:

Moody's downgrades GE and GECC to Aa2, outlook stable

23 Mar 2009

New York, March 23, 2009 -- Moody's Investors Service downgraded the senior unsecured debt ratings of General Electric Company (GE) and General Electric Capital Corporation (GECC), and subsidiaries, to Aa2 from Aaa. The rating assigned to debt that GECC has issued under the FDIC's Temporary Liquidity Guarantee Program was affirmed at Aaa. The Prime-1 short-term ratings of both firms were also affirmed. The outlook for all GE and GECC ratings is stable.

This concludes the review that was initiated for GE's and GECC's ratings on January 27, 2009.

In Moody's view, GE's primary credit risks are centered on its position as a major financial institution through GECC. The rating downgrade reflects Moody's opinion that the risk profile of GECC has increased and is now reflective of credits rated in the mid-"A" category (formerly high "A") without considering support from GE. The increased risk profile stems from several concerns, including the long-term risks associated with GECC's wholesale funding model as well as the earnings volatility resulting from deteriorating asset-quality trends. Moody's believes that GE's industrial operations continue to have strong Aaa characteristics, including a diversified portfolio of market-leading businesses that generate strong and durable profits and cash flow through cycles. Nevertheless, because the risks at GECC are increasingly prominent in the consolidated rating profile, GE's rating has been lowered to Aa2.

The stable ratings outlook reflects Moody's expectation that GECC will meet its objectives for improving liquidity and leverage in 2009. The outlook and rating also incorporate Moody's view that GECC could report pre-tax losses during the next few quarters as it contends with asset-quality deterioration. Critically, Moody's believes that GE's industrial businesses will generate strong cash flows during the global economic downturn, which could be used to support GECC should the need arise. Critical to this action is Moody's belief that GE's support of GECC continues to be unwavering, as evidenced by implicit and explicit actions, including its $15 billion in capital contributions to GECC in the last two quarters.

GECC's wholesale funding model is no longer consistent with a Aaa rating

The benefits of the global scale and diversification of GECC's businesses are equally matched by GECC's prominent presence in, and reliance upon, the global wholesale funding markets. While Moody's views GECC's diverse funding as a source of stability for its liquidity profile, during correlated capital-market contractions the size of the firm's funding needs results in significant refinancing risks. Since 2008, GECC has been strengthening its capital and liquidity to better protect its global businesses from these threats. Moody's expects that these improvements will be permanent. Notwithstanding these efforts, GECC's ongoing reliance upon confidence-sensitive funding is a principal source of recurring risk to its operational stability during periods of market disruption.

The current credit crisis has exposed the vulnerability of even the best risk-managed financial institutions to confidence sensitivity and capital market disruption. In Moody's view, the confluence of funding and operational pressures affecting GECC during deteriorating operating conditions -- and the corresponding support burden carried by GE -- is no longer consistent with a Aaa rating.

"GECC's Aa2 rating benefits from the firm support of GE," says Moody's senior analyst Mark Wasden. "Independent of this support, GECC's intrinsic credit characteristics are consistent with a mid-"A" rating profile, a change from our previous high "A" viewpoint," he added.

Moody's said that GECC has capably responded to the challenges of the current credit market environment with a number of liquidity and capital strengthening initiatives, including reducing its reliance on commercial paper to $50 billion from a peak of $102 billion as recently as March 31, 2008 (including $6 billion at GECC's immediate parent, General Electric Capital Services, GECS), increasing coverage from back-up bank lines to 100%, and reducing its total assets by the end of 2010 by $50-60 billion (8-9%). The GECC and GECS capital positions have been strengthened by $15 billion of capital contributed by GE. GECC has also been aided by its participation in U.S. government funding programs, including the Federal Reserve's Commercial Paper Funding Facility and the FDIC's Temporary Liquidity Guarantee Program. Moody's believes that these have been critically important to the ability of GECC to maintain operating stability in the current stressed environment. The new Aa2 rating incorporates the expectation that GECC will successfully transition back to a financing profile that is self-reliant when the government programs are eventually terminated. That said, it also is unlikely that GECC will enjoy the same level of access in the medium-term as it enjoyed before the crisis, as Moody's expects will be the case for most highly leveraged, wholesale funded financial institutions.

GECC's asset quality presents an additional downside risk

Over time, GECC's scale and diversification have helped to smooth periodic operating weaknesses in specific markets and businesses. However, the global nature of the current economic downturn has resulted in meaningful deterioration in the firm's asset-quality trends, posing a sizable downside risk to the firm's earnings in 2009 and 2010. The potential volatility of GECC's results under these conditions runs counter to the stable and predictable earnings thesis that has historically been central to the firm's ratings.

Moody's believes that the most significant risks to earnings in the current environment stem from GECC's U.S. consumer finance businesses ($28 billion earning assets at year-end 2008, including private label credit card and sales finance), U.K. residential mortgage business ($22 billion), and commercial real estate operations ($81 billion).

Weakening global economic conditions, including higher unemployment, are anticipated to result in wider losses in the consumer finance and mortgage portfolios. GECC has acted to cut credit availability in the card portfolio and reduce originations in the U.K. mortgage portfolio, but the expanding recession is expected to cause losses to outpace the effect of management's actions. GECC's commercial real estate business, comprised of a $48 billion portfolio of predominantly senior loans and a $33 billion portfolio of owned properties, is seeing the effect of rising vacancies, lower rental rates, and higher capitalization rates on loan performance and asset values. Management has scaled back new volumes in this business, but Moody's expects the segment to record a loss during 2009 due to lower gains and elevated credit loss and impairment charges.

GECC's Aa2 rating incorporates the expected underperformance of these and other businesses. Moody's believes that GECC could report pre-tax losses over the next several quarters, but that the most recent $9.5 billion capital infusion from GE will be sufficient to protect the firm's capital base from significant deterioration. And, even under a more severe stress scenario, Moody's views the capital generating capacity of GE as strong contingent support for GECC's capital base. Should asset quality deterioration in these or other portfolios result in sustained earnings underperformance, Moody's could view GECC's stand-alone profile as being weaker, which could put further pressure on the Aa2 rating.

GE earnings and cash flow are expected to be strong and resilient, but also face some downside risks

Moody's believes GE's industrial businesses will continue to maintain strong market positions globally across a broad range of products and services and generate strong levels of operating profitability and free cash flow during the currently weak economic environment. However, a protracted economic slowing and continued tight credit market conditions could create headwinds even for the company's long-cycle businesses Energy, Aviation, Transportation, and Healthcare through 2010. These units achieved record profits and cash flow in 2008.

Moody's anticipates that GE's industrial operations will generate between $2 billion and $3 billion of free cash flow in 2009 and stronger levels thereafter, reflecting in good part the company's recent dividend cut, which will preserve $9 billion annually in free cash flow.

"Even in a downside scenario, we expect that GE will be able to build significant financial flexibility over the intermediate term that could be used to support GECC if necessary," said Moody's senior vice president Richard Lane.

The performance of GE's short-cycle businesses (appliances, lighting, and local television stations) continue to exhibit weakness and could see greater earnings erosion during 2009. However, the impact on overall results should be modest given that these businesses constitute less than 5% of industrial profits.

Supporting the long term stability of cash flow is GE's $172 billion backlog of infrastructure equipment and services revenue (about 1.5x revenue). This backlog should generate recurring revenue streams, which supports our expectation that GE will demonstrate stable operating performance even in the current challenging environment. Further, ongoing initiatives to reduce costs and enhance cash flow generation should help to support near-term operating performance.

GE's long-term customer service agreements (CSA's) related to its huge and growing installed base of equipment worldwide (such as aircraft engines, locomotives, power generation turbines, and medical systems), are an important and recurring source of earnings and cash flow and a cushion against earnings volatility. GE's $35 billion of service revenue in 2008 (about 30% of the total revenue) represents a steady source of high-margin revenue streams that help to offset weakness in equipment sales during economic downturns.

Approximately half of GE's service revenue and profitability relate to its installed base of over 3,500 gas and steam turbines worldwide in addition to over 9,000 commercial and military aircraft engines that are under long-term service agreements. The remaining service activity is derived from a range of medical equipment, oil and gas products, and transportation equipment such as locomotives. GE's service revenue in 2008 represented 31% of industrial revenue, up from 20% in the mid 1990's, reflecting steady improvements in the company's business mix towards products and technologies that generate services revenue.

Moody's expects services operating profit in 2009 of about $9 billion to $10 billion. While utility, government, and industrial customers may have modest flexibility to defer some maintenance activity such as upgrades or system enhancements, regulatory requirements and pre-negotiated price increases that are in long-term CSA backlog provide for a high level of revenue and profit visibility. This framework also applies to aviation services, but with a modestly lower level of visibility given that service activity depends on a number of variables that include revenue passenger miles, the amount of aircraft takeoffs, and overall fleet mix.

The following ratings are affected by today's rating action (see Moodys.com for complete lists):

General Electric Company

Senior Unsecured: to Aa2 from Aaa

Subordinate Shelf: to (P)Aa3 from (P)Aa1

General Electric Capital Services, Inc.

Senior Unsecured Shelf: to (P)Aa3 from (P)Aa1

Backed Subordinate: to Aa2 from Aaa

General Electric Capital Corporation

Senior Unsecured: to Aa2 from Aaa

Subordinate: to Aa3 from Aa1

Preferred Stock: to A1 from Aa2

GE Capital Australia Funding Pty. Ltd.

Backed Senior Unsecured: to Aa2 from Aaa

GE Capital Canada Funding Company

Backed Senior Unsecured: to Aa2 from Aaa

GE Capital European Funding

Backed Senior Unsecured: to Aa2 from Aaa

GE Capital UK Funding

Backed Senior Unsecured: to Aa2 from Aaa

GE Japan Funding K.K.

Backed Senior Unsecured: to Aa2 from Aaa

All short-term ratings were affirmed at Prime-1. The ratings of debt issued by GECC under the FDIC administered Temporary Liquidity Guarantee Program were also affirmed at Aaa.

On January 27, 2009, Moody's placed the Aaa long-term ratings of GE and GECC on review for possible downgrade.

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 $183 billion for the year ended December 2008.

General Electric Capital Corporation, based in Stamford, Connecticut, is the legal entity which holds GE's investments in the commercial and consumer finance sectors.

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

Moody's downgrades GE and GECC to Aa2, outlook stable
No Related Data.
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