On March 12, 2009, Standard & Poor's Ratings Services lowered its long-term ratings on General Electric Co. (GE) and units, including General Electric Capital Corp. (GECC), by one notch to 'AA+' from 'AAA'. We affirmed the 'A-1+' short-term credit ratings. The outlook is stable.
The main factor in the downgrade was our assessment of the stand-alone credit profile of financial services unit GECC, which we now view as 'A', compared to the 'A+' we had indicated before. (We do not assign an outlook to this stand-alone credit profile). We believe that GECC is under increasing earnings pressure, due to recent sharp deterioration in general economic conditions around the globe. This will result, in our opinion, in rising credit losses across key segments of its finance portfolio. This is also causing weakening of the value of its real estate holdings and investment securities.
In addition, we expect some deterioration in earnings and cash flow from GE's industrial businesses during the next two years, given the very difficult global economic outlook. Still, we believe that GE's industrial businesses will generate about $2 billion in discretionary cash flow (after dividends) in 2009 and a significantly greater amount in 2010, aided by the 68% reduction in the common dividend that the company recently announced.
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Outlook
The outlook is stable. We believe that GE's cash generation capabilities remain fundamentally strong--even in the face of enormous global economic headwinds--and that it will generate growing cash balances from current levels over the next two years. We do not anticipate that GE will benefit from any meaningful earnings or cash flow from GECC through 2010.
We expect GE's commitment to maintaining very high credit quality, the still-solid prospects for many of its business segments (despite economic weakness), and the company's ample financial flexibility should continue to support the ratings at the current level and the stable outlook.
However, we could reexamine our outlook if, for example, we came to believe that GE would fail to generate discretionary free cash flow (after dividends) of around $2 billion in 2009 and significantly more in 2010 and retain a very substantial portion of this cash-–we would view a portion of this cash as available to support GECC. In light of the recent sharp reduction in the dividend, we expect this would likely require net earnings below $9 billion in 2009, which we believe could occur if revenues fell more than 5%, if industrial gross margins fell 100 basis points or more, and GE had little success in managing working capital in 2009.
We would also expect to review the outlook or rating if we came to expect that GECC would report significant losses for an extended period of time, if the company shifted its financial policies, or if strategic shifts in GE's portfolio of businesses were to jeopardize our view of the company's excellent business risk profile.
Immediate Retort By GE:
Standard & Poor’s (S&P) today announced a single-notch downgrade of General Electric Company’s and General Electric Capital Corporation’s (GECC) long-term ratings from AAA to AA+, with a “stable” outlook. The ratings downgrade does not affect GE’s and GECC’s short-term funding ratings of A-1+, which was affirmed by S&P [critical for CPFF access]. The action follows a thorough review of GE’s portfolio by S&P.
GECC is one of the only financial services companies in the world with a rating as high as AA+ [Ed. AIG was AA+ rated at the time it was nationalized]. S&P defines a company with this rating as having a “very strong capacity to meet its financial commitments.” Also, S&P’s "stable" outlook means the rating is unlikely to change in the next six months to two years.
GE does not anticipate any significant operational or funding impacts from this change. The Company has taken steps to strengthen its balance sheet and liquidity position, including building $48 billion in cash, raising over 90% of its 2009 long-term debt needs, and lowering its commercial paper to $60 billion from $88 billion in third quarter 2008. GE will provide a detailed update on GE Capital at a March 19 investor meeting.
GE Chairman and CEO Jeff Immelt said, “As we have previously said, we are prepared to fund the Company as a Double-A, but we will continue to run GE with the disciplines of a Triple-A company, which means low leverage, high liquidity and strong risk disciplines. While no one likes a downgrade, this review and rating reaffirm the relative strength of the Company.
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1 comments:
Time to post some collateral! Or maybe they can get a Buffett preferred-special loan?
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