Is nothing sacred? (Answer: no)
GE could lose its shiny triple-A rating within the next two years, S&P said on Thursday, citing concerns around earnings and cash flow. Likelihood of such a thing? One in three, according to S&P.
From the (very long and slightly fawning) statement:
Dec 18 – Standard & Poor’s Ratings Services today said it has revised its outlook on General Electric Co. (GE) and units, including General Electric Capital Corp. (GECC) to negative from stable and affirmed its ‘AAA’ long-term and ‘A-1+’ short-term credit ratings.
The rating outlook revision reflects, in part, concerns relating to GECC.
“The negative outlook is based partly on the concerns regarding GECC’s future performance and funding,” said Standard & Poor’s credit analyst Robert Schulz. “In addition, fundamentals-based earnings and cash flow could decline sufficiently during the next two years to warrant a downgrade.
“We will continue to monitor GECC’s success in executing on its funding and liquidity plans in light of capital market turmoil,” he continued. The rating affirmation is based on GE’s massive scale, diversity, and track record of managing its businesses (including its financial services unit GECC) in a variety of difficult markets, and on the demonstrated ability of these businesses to earn solid profits and generate substantial cash, even in very tough economic conditions. GE has not remained static in the face of negative economic and capital market conditions that will persist in 2009.
Its recent financial policy actions have been consistent with what we would expect of a company with the highest credit quality: raising equity and eliminating shareholder-friendly uses of cash (share repurchases, dividend increases, and major acquisitions).
The downsizing of GECC and the increase in liquidity resources available to GECC are other important factors in the affirmation. GECC will account for about a third of GE’s earnings in 2009–or less if worse-than-expected credit losses further reduce GECC’s earnings.
Even with its current standalone credit profile of ‘A+’, GECC remains one of the world’s most profitable and highly rated financial institutions. The ratings on GE reflect its excellent business risk profile, the minimally leveraged balance sheet for its industrial operations, its significant cash flow and liquidity, its strong corporate governance, and management’s commitment to maintaining the highest credit quality.
Recent actions announced regarding GECC, including the raising of $15 billion of common and preferred equity, are considered evidence of GE’s commitment to this level of credit quality. GECC is a core entity within GE, and financial services have historically contributed a substantial amount of consolidated earnings. In light of the turmoil sweeping the global financial services sector, we will continue to monitor closely any effect on GECC’s funding.
With its lower originations and earnings than in previous years, we expect GECC to lessen somewhat in importance to consolidated earnings and cash flow generation capabilities. Still, GECC needs to return its dividend payout to GE to higher levels after 2009.
As always, we will continue to monitor the balance between liquidity and capital resources at GECC and at the parent. Despite current U.S. and developing international economic weakness, we expect GE’s broad business and geographic diversity to allow for continued generous cash flow alongside a strong financial risk profile and maintenance of adequate capital at GECC.
We believe GE has about $10 billion of cash that could be infused into GECC, beyond the $5 billion already contributed in December 2008, and this additional contribution would represent a significant further increase in GECC’s equity. GE has strong leadership positions across its global business platforms.
Its diversity is unparalleled, customer concentration is negligible, sales are geographically dispersed, and its end markets run the gamut of economic activity. Still, its operations are exposed to varying degrees of cyclicality and price pressures, which has been clearly evident in 2008 and will remain so in 2009. Certain segments–notably portions of GECC and Consumer and Industrial products (appliances and lighting)-are suffering because of the weak U.S. economy and softening in real estate markets.
Etc.
GE’s shares fell 7.2 per cent to $16.14 in the immediate aftermath of the news, while five-year CDS on GECC widened to 415bp vs 395bp prior to the announcement, according to data from Phoenix Partners Group.
Related links:
GE and the triple-A: investors fret – Reuters analysis
Berkshire deal shows pressure on GE – FT
GE wins FDIC guarantee – FT