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Fitch Rates GE's Planned Euro Notes 'AA-'; Outlook Stable
May 10, 2017 / 3:45 PM / 7 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. 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