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
