Fitch Ratings published ‘AA-/F1+’ long- and short-term issuer default ratings (IDRs) for General Electric (GE) and GE Capital Global Holdings (GE Capital). Fitch has also published debt ratings for GE and GE Capital, including those of certain GE Capital subsidiaries. The rating outlook is stable. Approximately $156 billion of GE’s consolidated debt is covered by the ratings.

Fitch’s ratings and financial measures for GE’s industrial businesses (GE Industrial) consider GE Capital on an equity basis, including approximately $65 billion of GE Capital debt as of June 30, 2016 maintained as intercompany debt with GE. The ratings for GE Capital incorporate support from GE.

The Stable Outlook reflects Fitch’s expectation that GE will maintain a strong balance sheet and that after completing the divestiture of GE Capital’s non-core businesses the company’s priority for cash deployment will be acquisitions, which would be expected to generate incremental earnings and cash flow. A smaller GE Capital provides GE with incremental financial flexibility to leverage its balance sheet over the next several years, but 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 strong competitive positions.

The ratings incorporate expectations for potentially substantial capital deployment for acquisitions over the next several years, as well as continued high dividend payouts. Industrial debt issuance could be significant depending on acquisition opportunities. Fitch expects leverage metrics will rise modestly compared to current levels. The capacity for incremental debt would be supported by lower absolute risk related to GE Capital, expected growth in earnings and cash flow over the next several years, and additional earnings and cash flow from potential acquisitions. 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, strong market positions, strong services earnings, scale and technology portfolio.

The following commentary was excerpted from the Fitch Ratings news release:

• A key rating consideration is the ‘GE Capital Exit Plan,’ launched in 2015 and expected to be largely completed by the end of 2016. After its non-core businesses have been divested, GE Capital will be concentrated in its vertical businesses that serve the aviation, energy and industrial (working capital solutions, healthcare equipment finance, and trade payables services) markets. GE Capital’s smaller size reduces the company’s exposure to funding, credit quality, regulatory and other risks inherent to finance companies.
• GE Capital will still be large, with assets in excess of $100 billion, and will make a meaningful contribution to GE’s overall financial results. Although the majority of GE Capital’s volume is not directly related to financing sales by GE’s industrial business, GE benefits from the combined domain expertise and market presence offered by synergies between the finance and industrial platforms. GE Capital will also contribute to the diversification of GE’s overall business profile and the strong market position of the GECAS segment contributes to the quality of the rest of GE’s portfolio.
• An important aspect of the GE Capital Exit Plan is the significant reduction in dividends to GE from GE Capital, which Fitch estimates will directionally mirror the decline in ending net investment (ENI) from $363 billion at the end of 2014 to below $100 billion upon completion of the exit. However, GE’s dividend payments to shareholders will also decline, reflecting share repurchases and a lower share count targeted by GE associated with the GE Capital Exit Plan.
• GE Capital plans to pay $35 billion of dividends to GE under the GE Capital Exit Plan, including $18 billion in 2016. The large dividends will fund $35 billion of share repurchases. Other returns to GE shareholders include regular dividends and the $20 billion split-off of Synchrony Financial in 2015.
• The Oil and Gas segment has been especially affected by lower oil prices and the resulting decline in demand for oilfield equipment and services, with orders down approximately 39% in the first half of 2016, GE is implementing $800 million of cost reductions to achieve its targeted 30% organic decline in segment operating profit for the year. Revenue in the Transportation segment is likely to fall by in 2016 due to rising industry levels of parked locomotives associated lower commodity-driven freight shipments, and the sale of the signaling business to Alstom in late 2015.
• 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. GE has made strong legal commitments to support GE Capital under the second global supplemental bond indenture dated December 2, 2015, under which GE Capital’s existing obligations are fully, irrevocably and unconditionally guaranteed by GE. In addition, GE Capital operates in the same jurisdictions as GE and is a wholly-owned subsidiary of GE. Lastly, the reduced size of GE Capital’s assets to $219.4 billion as of June 30, 2016 from $500.6 billion as of December 31, 2014, increases GE’s financial ability to support GE Capital.
• 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 regulatory oversight of GE Capital going forward.
• Fitch views GE Capital’s execution on the exit plan as strong, with signed agreements with buyers for $181 billion of ENI excluding liquidity, of which $158 billion was completed as of June 30, 2016. In 2015, GE Capital also finalized the split-off of Synchrony Financial, merged legacy GE Capital into GE, and exchanged $36 billion of legacy GE Capital debt for new GE guaranteed notes. GE Capital returned $25 billion to GE in 2015 including dividends and paid $15 billion in dividends to GE year-to-date through July 2016, with $18 billion expected for full-year 2016.
• GE announced that the Financial Stability Oversight Council had rescinded GE Capital’s designation as a Domestic Systemically Important Financial Institution (D-SIFI) effective June 28, 2016. However, GE Capital remains indirectly regulated, as its foreign subsidiary, GE Capital International Holdings, remains supervised by the UK Prudential Regulation Authority until its banking interests in the European Union are exited.
• GE Capital has strong underwriting standards and risk controls. In 2012, it enhanced its economic capital (E-Cap) framework based on regulatory guidance and industry practice. The E-Cap model utilizes various tools that are driven by simulations and Value-at-Risk across various asset classes. These include aircraft operating leases and aircraft loans in GE Capital Aviation Services (GECAS), debt, tax equity and equity investments in structured and project finance in GE Energy Financial Services (EFS), and working capital solutions and trade payables services in GE Industrial Finance (IF). The company also performs ongoing stress testing. GE Capital’s overall control framework consists of limits, product standards, monitoring and reporting to governing bodies including the Enterprise Risk Management Committee and GE board of directors, which ensures compliance and regular monitoring.
• Asset quality metrics have been largely stable despite the shift in portfolio mix as a result of the exit plan that has weakened overall lessee and borrower credit quality. Allowance for losses on financing receivables totaled $74 million in Q2/16, representing 0.31% of financing receivables, down from $81 million in 2015 (0.32% of financing receivables) and $93 million in 2014 (0.36% of financing receivables). However, GE management recently stated that the oil and gas environment remains tough, and therefore Fitch expects that energy equity investments could face further asset quality challenges in the near to medium term.
• GE Capital’s earnings and profitability ratios in 2015 and the year-to-date period ended June 30, 2016 were negatively impacted by one-time financial charges associated with the GE Capital exit plan, as well as losses from discontinued operations. Net loss from GE Capital attributable to GE common shareowners was $2.3 billion in the first half of 2016 and a $15.8 billion net loss in 2015, compared to net earnings of $6.9 billion in 2014 and net earnings of $5.9 billion in 2013. Fitch expects financial charges and earnings from discontinued operations to become less meaningful as the company completes the GE Capital Exit Plan throughout the remainder of 2016.
• On a core basis, Fitch views GE Capital’s earnings as strong, supported in part by the benefit of lower funding costs relative to most standalone finance and leasing companies. Return on average assets (ROAA), defined as GE Capital’s net earnings attributable to GE common shareholders excluding after-tax charges related to the GE Capital Exit Plan divided by average assets, was 1.5% in 2015, though negative 1.4% in the first half of 2016 due to the timing of charges prior to dispositions. ROAA was 1.4% in 2014, 1.1% in 2013 and also 1.1% in 2012.
• The ‘AA-‘ IDR for GE Capital EFS Financing reflects the credit support provided by GE Capital, and thus GE, to GE Capital EFS Financing. The ‘F1+’ rating for GE Capital Treasury Services follows the formation of this entity as an issuer of commercial paper, guaranteed by GE, which is used to fund short-term working capital needs of GE Capital’s operations.
• The ‘AA-‘ senior secured debt rating of GE Capital and the ‘AA-‘ senior unsecured debt ratings of GE Capital International Funding and other GE Capital subsidiaries are equalized with the IDRs of these entities and reflect Fitch’s expectation of average recoveries. The ‘A+’ subordinated debt rating and the ‘A’ preferred stock rating reflect incremental risk relative to the IDR; these notches are a function of increased loss severity due to subordination and heightened risk of non-performance relative to senior obligations.