New York, January 27, 2009 -- Moody's Investors Service placed the long-term ratings of
General Electric Company (Aaa senior unsecured) and General Electric Capital
Corporation (GECC; Aaa senior unsecured) on review for possible downgrade.
The firms' Prime-1 short-term ratings were affirmed.
The review also has no impact on the FDIC-guaranteed debt issued
by GECC, which remains at Aaa with a stable outlook. Moody's
said the review for downgrade is based primarily upon heightened uncertainty
regarding GECC's asset quality and earnings performance in future
periods.
General Electric Capital Services (GECS, GECC's immediate
parent) recorded a $1.5 billion consolidated pre-tax
loss from continuing operations for the fourth quarter of 2008 on higher
credit and other charges. Additionally, the firm revised
upward its estimate for credit losses in 2009. Moody's is
concerned that deepening global economic weakness could further compromise
GECS' asset quality, potentially jeopardizing its ability
to meet earnings objectives while also maintaining high earnings quality.
In its December 2008 press release, Moody's identified the
following factors as important credit considerations for GE and GECC:
1) a downsizing of GECC and a reduction in its reliance on confidence-sensitive
short-term funding while maintaining solid earnings and asset quality;
(2) GECC achieving earnings of $5 billion in 2009 and each of the
next several years; (3) a restoration of the GECS dividend to GE
to historical levels by 2010; (4) generation of industrial cash flow
from operations that exceeds $16 billion in 2010; (5) a suspension
of share buybacks until these expectations are realized; and (6)
the potential to reduce the stress on GE's industrial free cash
flow either through the resumption of more significant dividends from
GECS to GE or through the reduction of the GE external dividend.
Moody's said that its review will focus on each of these factors
in light of weakening market conditions.
GECS Earnings Stability and Dividend Ability Key Focus
During its review, Moody's will consider potential ongoing
challenges to, and increasing volatility in, GECS' earnings
in an exceptionally difficult operating environment. Given this
uncertainty around earnings, Moody's will also reassess GECS's
ability to restore its dividend to GE to historic levels in the intermediate
term.
"Historically, a hallmark of the GECC credit has been its
ability to consistently create capital," Moody's analyst
Mark Wasden said.
During its review, Moody's will also reevaluate its expectations
of GE industrial cash flow in 2009 and 2010. The combination of
potentially reduced industrial cash flows and GECS dividends would place
more stress on the company's ability to meet external dividend payments
through operating cash flows.
Moody's expects that GE's cash flow from operations,
including the dividend from GECS, could decline below prior expectations
of about $16 billion in 2009. This expectation considers:
1) Moody's view that the decline in GECS' 2009 net income
could be more significant than originally anticipated as a consequence
of accelerated and deeper deterioration of asset quality; 2) the
increasingly challenging business conditions in GE's long cycle
and short cycle industrial operations; and 3) a likely reduction
of progress payments received by GE as a result of the slowdown in infrastructure
orders worldwide, although this may be offset by working capital
reductions.
Absent a timely restoration of adequate dividends from GECS, the
continuation of the current high level of GE common dividends may not
be possible from internally generated funds.
"Incremental borrowing or reduction of existing liquidity levels
to meet the dividend would be uncharacteristic for a firm with a Aaa rating,"
said Moody's analyst Richard Lane.
In the fourth quarter, GECS' rate of net charge-offs
in continuing businesses weakened to 1.36% from .87%
in the third quarter. Non-earning assets also increased
to 2.12% from 1.72%, indicating mounting
asset quality weakness. In its earnings announcement, management
said its estimate of 2009 credit loss provisions had increased to $10
billion -- $1 billion higher than communicated in
December 2008 -- though it also affirmed its framework for
achieving 2009 earnings of $5 billion.
"GECS' fourth quarter earnings were positive because of significant
tax benefits," said Moody's Wasden. "The
firm can probably compensate for some portion of higher credit costs by
improving operating efficiency. But we believe the individual components
of earnings are important. We therefore look for sustainable,
high quality earnings as a measure of the firm's success."
Progress Noted on Liquidity, Capital Position
Positively, during the fourth quarter, GE management met interim
targets to improve the liquidity and capital positions of GECS and GECC.
Outstanding commercial paper (GECS) declined to $72 billion from
$88 billion at the end of the third quarter, and the company
affirmed its intention to reduce CP balances to $50 billion by
the end of 2009. As a consequence of this reduction, committed
bank line coverage of commercial paper balances improved to 83%
from 71% at the end of the third quarter, reflecting good
progress towards the company's objective of 100% coverage
by the end of 2009. Management also continued to diversify funding
sources to include additional deposits and other alternatives, which
increased by $25 billion in 2008 with continued growth slated for
2009.
GECC has also utilized the U.S. Federal Reserve's Commercial
Paper Funding Facility (CPFF) and the FDIC's Temporary Liquidity Guarantee
Program (TLGP). Though temporary in nature, Moody's
believes these programs have had a stabilizing effect on GECC's
short-term liquidity, while the company shifts its funding
profile to be less reliant on commercial paper.
GECS ended 2008 with cash of $36 billion, the result of fourth
quarter pre-funding of about $13 billion of 2009 planned
term debt issuance of $45 billion, a $5.5 billion
capital injection from GE, and higher retained cash flow due to
the lower dividend payout to GE. Additionally, GECC reduced
its leverage during the quarter.
Moody's believes the measures taken by management and the firm's
access to government support programs have ameliorated near-term
liquidity risks at the firm and have also reduced the potential near-term
need for GE support.
GE Industrial Business Likely to Soften
Moody's also notes that GE's industrial businesses retain strong
competitive positions, and should demonstrate improved performance
once the economy rebounds. Additionally, the company's
$172 billion of infrastructure equipment and service backlog provides
important visibility into future revenue. Recent initiatives to
reduce costs and enhance cash flow generation should also help to support
near term operating performance.
"Nevertheless, the global economic downturn and continued tight
credit market conditions create some strong headwinds for the company's
long cycle Energy, Aviation, Transportation, and Healthcare
businesses," said Moody's Lane. "Reduced order
flow and deferral or cancellation of existing orders could be a more significant
concern in the coming year."
Performance of the company's short cycle businesses (appliances,
lighting, and local television stations) continue to exhibit weakness
and could see greater earnings erosion during 2009. The impact
of these short cycle businesses on GE industrial's overall performance,
however, should be modest as they represent less than 5%
of industrial operating profit.
The following ratings are placed under review (see Moodys.com for
complete lists):
General Electric Company
Senior Unsecured: Aaa
Subordinate Shelf: (P)Aa1
General Electric Capital Services, Inc.
Senior Unsecured Shelf: (P)Aa1
Backed Subordinate: Aaa
General Electric Capital Corporation
Senior Unsecured: Aaa
Subordinate: Aa1
Preferred Stock: Aa2
GE Capital Australia Funding Pty. Ltd.
Backed Senior Unsecured: Aaa
GE Capital Canada Funding Company
Backed Senior Unsecured: Aaa
GE Capital European Funding
Backed Senior Unsecured: Aaa
GE Capital UK Funding
Backed Senior Unsecured: Aaa
GE Japan Funding K.K.
Backed Senior Unsecured: Aaa
On December 2, 2008, Moody's affirmed the Aaa long-term
and Prime-1 short-term ratings of GE and GECC, following
the announcement by GE that it would undertake measures to strengthen
GECC's financial position.
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 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 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 reviews GE, GECC Aaa long-term ratings for possible downgrade
