On Mar. 12, 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. S&P 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 believe that GECC is under increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe," said Standard & Poor's credit analyst Robert Schulz. "This will result, in our opinion, in rising credit losses across key segments of GECC's finance portfolio. Still, we believe that GE's industrial-based 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 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.
The ratings on GE continue to reflect our view of its excellent business risk profile, its significant cash flow and liquidity, its strong corporate governance, and management's commitment to maintaining very high credit quality. In our view, the company has a track record of managing its businesses (including its financial services unit GECC) in a variety of difficult markets, and a demonstrated ability for these businesses to earn solid profits and generate substantial cash, even in very tough economic conditions.
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, 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 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 the company's excellent business risk profile.