Most company CFOs salivate over the prospect of a AA+ credit rating, but it’s a big disappointment for General Electric as Standard & Poor’s cut its long-term rating on GE and its GE Capital subsidiary one notch from the long-held AAA rating – the highest possible. GE’s stock actually rose on the news, since some observers had expected a drop of more than one notch. The S&P commentary made no mention of NBC Universal, owned 80% by GE, as it focused almost exclusively on the lending arm.
Here’s what S&P had to say about the industrial giant:
“Standard & Poor’s Ratings Services today 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 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.”
In response, GE issued its own statement:
“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. 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+. 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’.”