Reuters logo
Fitch Rates GE's Planned Euro Notes 'AA-'; Outlook Stable
May 10, 2017 / 3:44 PM / 6 months ago

Fitch Rates GE's Planned Euro Notes 'AA-'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, May 10 (Fitch) Fitch Ratings has assigned a rating of 'AA-' to General Electric Company's (GE) planned issuance of euro-denominated fixed-rate senior unsecured notes with a mix of maturities. Proceeds will be used to fund acquisitions and/or repay $4 billion of 5.25% notes scheduled to mature in December 2017. Any remaining proceeds will be used for general corporate purposes. A full rating list appears at the end of this release. KEY RATING DRIVERS - GE Industrial Fitch expects GE's leverage metrics will rise modestly when considering debt-funded acquisitions that include the pending combination of GE's Oil & Gas (O&G) business with Baker Hughes, Incorporated (BHI) and the recently completed acquisitions of LM Wind Power for approximately $1.7 billion and ServiceMax for approximately $900 million. GE's capacity for incremental debt is supported by the reduction in absolute risk related to the GE Capital exit, expected growth in earnings and cash flow over the next several years, and additional earnings and cash flow from acquisitions. In addition to acquisitions, GE is divesting non-core Water and Industrial Solutions businesses. The impact of GE's acquisitions on financial results and credit metrics should not exceed Fitch's negative rating sensitivities but does leave the company with less financial flexibility. However, Fitch expects credit metrics such as leverage will remain appropriate for GE's overall enterprise risk level, which Fitch considers to be relatively low as a result of GE's diversification, solid balance sheet, leading market positions, strong services earnings, large scale, and strong technology portfolio. A smaller GE Capital, which largely consists of vertical business related to GE's industrial businesses, provides GE with incremental financial flexibility to leverage its balance sheet over the next several years. However, Fitch expects GE will maintain a disciplined financial strategy that supports its ability to invest in its long-cycle power and aviation businesses, focus on markets with high technology content, and maintain competitive positions in its key end markets. When completed, the BHI transaction will create the second largest global oilfield services business. GE will have a 62% interest in the combined business ('New' Baker Hughes), which is being structured as a tax-advantaged partnership between GE and the existing shareholders of BHI. The combined business should compete more effectively and offer a path toward improved efficiency for customers. GE will pay $7.4 billion of cash to BHI which will be used to fund a dividend to BHI shareholders. The transaction is expected to close in mid-2017. Fitch estimates the enterprise value of the combined business at approximately $50 billion. Risks related to the agreement with BHI include integration risk, the realization of anticipated synergies, the negative cash impact from any breakup fee if the transaction is not completed, and the risk that the oil and gas industry remains weak for an extended period. Rating concerns include potential support required for GE Capital (albeit much lower than in the past), large net pension liabilities, the risk that future larger-than-expected share repurchases or acquisitions could weaken GE's currently strong financial profile, and cyclicality in GE's infrastructure markets. However, Fitch believes future acquisitions will be targeted toward adjacent industrial markets, of which the pending 'New' Baker Hughes partnership is an example, and that GE will be disciplined in its cash deployment for acquisitions or share repurchases. Other rating concerns include the typical large intra-quarter use of commercial paper and the high dividend payout which affects free cash flow as defined by Fitch. In addition, GE is subject to pressure by an activist investor, Trian Partners, to improve results, and GE recently accelerated its cost reduction plans. A lower cost structure would support GE's credit profile, but the company could potentially be pressured to increase financial leverage beyond Fitch's current expectations. Rating concerns are offset by GE's diversification, significant financial resources, and steady operating performance through business cycles compared to its industrial peers. GE's financial leverage included total adjusted debt/EBITDAR of 2.6x at Dec. 31, 2016, defined to include customer receivables factored through GE Capital that totaled $12.3 billion at Dec. 31, 2016. Fitch's calculation of leverage would be lower when including earnings from GE Capital which Fitch excludes from EBITDA in order to focus on industrial credit metrics. Leverage would be higher if GE's intra-quarter use of commercial paper were included. The company repays most commercial paper at quarter-ends as part of its working capital management. A portion of the repayment is funded temporarily from cash located outside the U.S., which Fitch does not typically include as available cash due to tax liabilities that could be incurred if the cash is repatriated. GE's industrial business maintained total cash balances of $7.9 billion at March 31, 2017 compared to $2 billion of commercial paper balances. Fitch's ratings and financial measures for GE's industrial businesses (GE Industrial) consider GE Capital on an equity basis, including approximately $50 billion of GE Capital debt as of March 31, 2017 maintained as intercompany debt with GE. The ratings for GE Capital incorporate support from GE. The ratings for GE incorporate the company's global presence, broad product portfolio, large market shares in its core infrastructure and healthcare markets, strong technological capabilities and substantial services revenue which dampens the impact on financial results from volatility in the company's energy and capital goods end-markets. Some credit protection measures are weak for the rating, but Fitch believes GE's strong operating profile and financial resources give it a low overall enterprise risk. Fitch estimates FCF after dividends in 2017 could be slightly positive. Fitch's calculation of FCF is after pension contributions; it excludes the impact of changes in receivables sold to GE Capital. Corporate dividends to shareholders represent a large use of operating cash flow and contribute to GE's low FCF compared to some other large industrial companies. Fitch also considers GE's cash flow metrics adjusted to include dividends from GE Capital as GE Capital is a significant contributor to GE's consolidated financial results and valuation. Fitch estimates these dividends, excluding one-time large dividends in the near term, could be approximately $1 billion annually after the GE Capital exit is completed. Under Fitch's criteria for rating non-financial corporates, Fitch calculates an appropriate debt/equity ratio of 6x at Financial Services based on solid asset quality, sufficient liquidity and strong funding profile. As actual debt/equity as measured by Fitch was below this level, there would be no need to make an equity injection to maintain leverage at or below the 6x level. KEY RATING DRIVERS - GE Capital The IDRs for GE Capital and its rated subsidiaries are linked to and equalized with those of GE, reflecting Fitch's view that GE Capital is a core subsidiary of GE, as defined under Fitch's 'Global Non-Bank Financial Institutions Rating Criteria.' This view is supported by the fact that GE Capital remains a key and integral part of certain of GE's industry verticals, shares its branding with the broader GE organization and benefits from explicit guarantees of its existing financial obligations. Credit strengths of GE Capital on a standalone basis include its strong franchise and global brand, market leading position in aircraft lending and leasing, established positions in energy finance and industrial finance, strong and experienced management team, adequate liquidity, reduced commercial paper utilization, and high unsecured debt levels. Credit constraints on a standalone basis include reliance on wholesale funding sources, cyclicality and residual value risk inherent in certain of GE Capital's activities, particularly aircraft leasing, and less current and expected regulatory oversight of GE Capital. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for GE Industrial include: --Organic revenue grows by low- to mid-single digits in 2017 reflecting strength in Aviation and Renewables, a cyclical decline in demand for locomotives, and some stabilization in Oil & Gas. --The combination of GE Oil & Gas with Baker Hughes is completed in mid-2017. --Margins improve due to benefits from the integration of Alstom and ongoing cost improvements. --Large dividends from GE Capital are used to fund share repurchases. --GE generates positive FCF. --Cash deployment prioritizes acquisitions over share repurchases. RATING SENSITIVITIES GE Industrial Future developments that may, individually or collectively, lead to a negative rating action include: --GE directs its operating strategy away from its industrial businesses; --Market shares decline materially; --Services generate a consistently lower proportion of revenue and profit; --EBITDA margins fail to recover from lower levels in 2016; --GE Capital's asset quality and liquidity are weaker than expected, resulting in lower dividends to, or requiring support from, GE. --GE's financial strategy becomes more aggressive than expected, including debt-funded acquisitions or share repurchases that lead to consistently higher leverage, including total adjusted debt/EBITDAR sustained above 2.0x (above 3.0x including Fitch's adjustments for factored receivables), or funds from operations (FFO) adjusted leverage sustained above 2.2x (above 3.2x including Fitch's adjustments for factored receivables). Future developments that may, individually or collectively, lead to a positive rating action include: --Segment margins increase toward 20% on a sustained basis. --FCF and liquidity are sufficient to reduce GE's average commercial paper usage well below $10 billion. LIQUIDITY AND DEBT STRUCTURE GE Industrial's liquidity as of March 31, 2017 included cash of $7.9 billion in addition to a small amount of short-term marketable securities. Most of GE's cash is held outside the U.S. and is subject to income taxes if repatriated. Some cash ($3.5 billion as of Dec. 31, 2016) is also subject to currency controls. Average cash and debt balances are higher than reported at quarter ends due to GE's use of commercial paper, but there is relatively little change in net debt. Commercial paper typically is highest during intra-quarter periods and is substantially repaid before quarter ends using overseas cash. GE's average commercial paper balance in the first quarter of 2017 was $14.8 billion; balances during the quarter peaked at $19.7 billion. Liquidity also included $20 billion of credit lines exceeding one year. GE Capital has indirect access to the lines through intercompany loans from GE Industrial. GE's liquidity was offset by $8.8 billion of debt due within one year, which includes short-term debt and current maturities of long-term debt, net of intercompany receivables from GE Capital related to debt assumed by GE. FULL LIST OF RATINGS Fitch currently rates GE and its subsidiaries as follows: General Electric Company --Long-Term IDR 'AA-'; --Senior secured debt 'AA-' --Senior unsecured debt 'AA-'; --Senior unsecured bank credit facilities 'AA-'; --Subordinated guaranteed debt 'AA-'; --Subordinated debt 'A+'; --Junior subordinated debt 'A+'; --Preferred stock 'A'; --Short-Term IDR 'F1+'; --Commercial paper 'F1+'. GE Capital Global Holdings, LLC --Long-Term IDR 'AA-'; --Short-Term IDR 'F1+'. GE Capital EFS Financing Inc. --Long-Term IDR 'AA-'. GE Capital Treasury Services LLC --Short-Term IDR 'F1+'; --Commercial paper 'F1+'. GE Capital International Holdings Ltd. --Long-Term IDR 'AA-'. GE Capital US Holdings, Inc. --Long-Term IDR 'AA-'. GE Capital International Funding Co. --Long-Term IDR 'AA-'; --Senior unsecured debt 'AA-'. GE Capital Australia Funding Pty. Ltd --Senior unsecured debt 'AA-'. GE Capital Canada Funding Company --Senior unsecured debt 'AA-'. GE Capital European Funding --Senior unsecured debt 'AA-'. GE Capital UK Funding --Senior unsecured debt 'AA-'. SUSA Partnership, L.P. --Senior unsecured debt 'AA-'. Security Capital Group Inc. --Senior unsecured debt 'AA-'. The Rating Outlook is Stable. Contact: GE Primary Analyst Eric Ause, CFA Senior Director +1-312-606-2302 Fitch Ratings, Inc. 70 Madison Street Chicago, IL 60602 Secondary Analyst Craig Fraser Managing Director +1-212-908-0310 Committee Chairperson Mark Sadeghian Senior Director +1-312-368-2090 GE Capital Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Johann Juan Director +1-312-368-3339 Committee Chairperson Mark Sadeghian Senior Director +1-212-368-2090 Date of Relevant Committee: Oct. 28, 2016 SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS Factoring: GE Industrial's debt and assets have been adjusted to include more than $12 billion of off-balance sheet customer receivables factored through GE Capital as of Dec. 31, 2016. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below