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Moody's Downgrades GE Rating to Aa3: GE Capital Downgraded to A1

April 04, 2012, 07:45 AM
Filed Under: Corporate Ratings

Moody's Investors Service downgraded the senior unsecured debt rating of General Electric Company (GE) to Aa3 from Aa2 and the senior unsecured rating of its wholly-owned finance subsidiary, General Electric Capital Corporation (GECC), to A1 from Aa2. Moody's affirmed the Prime-1 ratings of both companies. The rating outlook for GE and GECC is stable.

The downgrades result from the implementation of Moody's revised global rating methodology for finance companies, and reflect in particular the impact of GECC's higher risk profile on GE. Moody's believes the risk profiles of market-funded financial institutions, including GECC, are higher than was previously reflected in their ratings. While GECC has improved its liquidity and capital levels since the onset of the credit crisis, Moody's believes that,  notwithstanding these positive steps, there remain material risks associated with the firm's funding model. Moody's therefore revised its view of GECC's standalone credit profile to Baa1 from A2.

With a senior debt rating of A1, GECC is now rated one-notch lower than GE but three notches higher than its Baa1 standalone profile. This reflects Moody's view that support from GE is highly likely but not certain in the absence of a guarantee. To lift GECC's rating further from its standalone credit profile and equalize it with GE's rating would require a higher degree of support certainty.
GECC's A1 rating reflects the firm's stand-alone credit profile, equivalent to a Baa1 rating, as well as the uplift from Moody's expectation of GE's strong parental support. Key aspects of GECC's stand-alone strength are its global presence and scale in multiple commercial and consumer finance businesses, which have provided revenue diversity and relative earnings stability over an extended period. Moody's continues to view GECC as one of the strongest finance companies in the world. However, GECC's large size also requires that it rely on the capital markets to fund its portfolios. During the credit crisis, these markets were unreliable for even the strongest issuers.

During the downturn GECC took steps to address refinancing risk by reducing commercial paper borrowing to less than half pre-crisis levels, accumulating a significant cash cushion to pre-fund debt maturities, diversifying funding sources to include deposits and secured financing, and extending the average maturity of debt outstanding. GECC has also reduced earning assets by more than 20% since 2008 by divesting or running off higher risk and underperforming portfolios, while also increasing shareholders' equity by 37%.

"These measures better position GECC to withstand future disruptions in funding access," said Moody's senior analyst Mark Wasden. "Nevertheless, we believe that GECC's revised strategies do not fully mitigate risks to its credit profile associated with its high reliance on confidence-sensitive funding."

Ratings Outlook
The stable ratings outlook reflects Moody's expectation that GE's industrial operations will generate strong levels of profitability and free cash flow during the currently slow growth economic cycle. It also encompasses the expectation that GECC will continue to improve its liquidity profile. Over the longer term, the outlook also reflects Moody's expectation that GECC will generate superior earnings and asset quality measures while maintaining strengthened liquidity and capital positions. Moreover, the stable outlook incorporates the expectation of GE's ongoing strong support for GECC.

To read the full Moody’s Investors Service press release, click here.

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