Capital Markets

GE Fights to Keep its Triple-A Bulbs Burning

With some once-sterling GE and GE Capital ratings under review for a possible downgrade by Moody's, all eyes are on how the company responds.
Stephen Taub and Roy HarrisJanuary 28, 2009

General Electric Co.’s gold-plated credit rating now faces perhaps its biggest threat in recent memory.

Meanwhile, GE is desperately trying to defend its $1.24 annual dividend, which at its current depressed stock price is throwing off a 9.5 percent yield.

Moody’s Investors Service placed the long-term ratings of GE, presently Aaa, along with General Electric Capital, presently Aaa, 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.

Even so, Moody’s said that the review for downgrade is based primarily upon heightened uncertainty regarding GECC’s asset quality and earnings performance in future periods.

If the GE debt is downgraded, of course, it would raise the conglomerate’s cost of capital at the parent level and at its units, except for GECC.

In a statement issued late yesterday, GE noted that the Moody’s action was a follow-up to the ratings service’s December review of the GE 2009 operating plan. “GE has outlined a plan for the year that is based on the difficult global economic environment we see,” the statement said. “During the next few months, we will work constructively with Moody’s on its review. Our objective is to maintain our Triple-A rating but we do not anticipate any major operational impacts should that change. We expect to deliver on the 2009 financial framework that we outlined last week. “

Experts assert that the fate of the credit rating and the dividend will have a lasting impact on the legacy of GE CEO Jeffrey R. Immelt.

In its report this week, Moody’s said that it is concerned that deepening global economic weakness could further compromise the asset quality of General Electric Capital Services, GECC’s immediate parent, potentially jeopardizing its ability to meet earnings objectives while also maintaining high earnings quality. It noted that GECS recorded a $1.5-billion consolidated pretax 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.

In December, Moody’s identified the following forward-looking factors as important credit considerations for GE and GECC: A downsizing of GECC and a reduction in its reliance on confidence-sensitive short-term funding while maintaining solid earnings and asset quality; GECC achieving earnings of $5 billion in 2009 and each of the next several years; a restoration of the GECS dividend to GE to historical levels by 2010; generation of industrial cash flow from operations that exceeds $16 billion in 2010; a suspension of share buybacks until these expectations are realized; and 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. During its review, Moody’s also will consider potential ongoing challenges to, and increasing volatility in, GECS’ earnings “in an exceptionally difficult operating environment.”

Given this uncertainty swirling around earnings, Moody’s said it 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.

The review will reevaluate 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 added. It also warned that, 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.

GE said in its statement yesterday that it had taken steps to strengthen its liquidity position, including a reduction in GECS’s’ commercial paper from $88 billion in the third quarter to $65 billion today. “We have raised 64 percent of our long-term funding for 2009. The company has more than $50 billion in cash on hand,” the statement said. It added that it had increased its alternative funding last year by $25 billion, and will extend that funding “in 2009 and beyond.”

Since at least last September, GE has been saying that it would maintain its dividend, which it pays at a 31-cent quarterly rate.