Financial Performance

Fitch Lowers General Electric Credit Ratings

The rating agency says GE's return to higher margins and stronger free cash flow is going more slowly than it previously anticipated.
Matthew HellerNovember 28, 2017

If new General Electric CEO John Flannery needed any more incentive to make “major changes” at the company, he may be getting it from the credit rating agencies.

Following Moody’s lead, Fitch Ratings on Tuesday downgraded the long-term issuer default ratings for GE and GE Capital to “A+” from “AA-” and their short-term issuer default ratings to “F1” from “F1+”, with a negative outlook.

“The downgrade of GE’s ratings considers the deterioration in the company’s operating and financial performance including a slower return to higher margins and stronger free cash flow than previously anticipated by Fitch,” the rating agency said in a news release.

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“GE’s performance is being affected by secular changes in the Power segment’s gas turbine business that has reduced long-term prospects for growth,” it added.

Earlier this month, Moody’s downgraded General Electric one notch to “A2” from “A1,” citing “severe deterioration” in the financial performance of GE’s power segment expected to last through at least 2019.

For its most recent quarter, GE experienced its biggest earnings miss in at least 17 years, with profit from the power business, which has been hit by overcapacity and the shift to renewables, declining 51% percent to $611 million. Flannery has said the third-quarter results made it clear that “we need to make some major changes with urgency.”

Fitch noted that GE “has identified several actions that should improve its operating performance, but the implementation could occur over an extended period and Fitch believes there are numerous execution risks.”

While GE’s overall enterprise risk is “relatively low,” Fitch said, its ratings could be further downgraded if EBITDA margins “do not improve meaningfully after 2018, restructuring in the Power business is ineffective or FCF after dividends does not increase as anticipated by Fitch.”

For 2017, Fitch is estimating free cash flow after dividends could be negative by as much as $6 billion to $7 billion, reflecting in part heavy cash usage in the power business. The same metric is expected to become positive at approximately $1 billion to $2 billion in 2018.

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