General Electric (GE) Ratings Affirmed by Moody's Amid New Baker Hughes Venture

October 31, 2016 11:37 AM EDT

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Moody's Investors Service affirmed its ratings for General Electric Company (NYSE: GE) -- including the company's A1 senior unsecured debt and Prime-1 short-term commercial paper ratings -- following the announcement of a proposed transaction with Baker Hughes. The rating outlook remains stable. Separately, the ratings and outlook for GE's finance company subsidiary, GE Capital Global Holdings, LLC (GE Capital), are unaffected by the announcement and remain unchanged.

"GE and Baker Hughes are bringing together mostly distinct yet complementary assets that will result in an industry leading integrated oil field equipment and services company," said Russell Solomon, Senior Vice President and Moody's lead analyst for General Electric Company. Moreover, the development is broadly in line with Moody's prior expectations for the company's capital deployment and industrialization strategies. The new publicly traded integrated oil & gas company will be considerably stronger and better positioned for the coming recovery in oil & gas end markets than either company otherwise would be on a stand-alone basis, according to the rating agency.

However, "the development is initially credit negative for the remaining GE industrial company, given the leveraging impact of the incremental debt funding and concurrent loss of the earnings stream from GE's previously wholly-owned oil & gas business," noted Solomon. Moody's said that, from a credit perspective, GE will not immediately benefit from its ownership in the larger entity. Rather, Moody's estimates that it will take a couple of years from the closing date of the proposed transaction -- currently estimated to occur around mid-2017 -- before the net cash flow impact will be accretive to GE, following an initial period of one-time restructuring and integration costs, and an expected improvement in the operating environment. "The transaction should boost the cash flow profile of GE over the intermediate term, nonetheless, as GE benefits from improving end markets for both its own and Baker Hughes' business, as well as synergies related to initial cost-cutting initiatives and cross-selling of products and services," said Solomon.

Moody's cautioned investors that the transaction comes at a time of ongoing heavy investment activity in GE's remaining core industrial businesses. Coupled with a heightened competitive environment and persistent macroeconomic volatility, the company's cash generating capability will remain somewhat constrained over the interim period. In particular, GE's high dividend payout and upcoming capital calls -- requisite pension contributions and the Alstom put -- leaves the company somewhat capital constrained 2017-19, in Moody's estimation.

"The level of underlying financial flexibility available to GE -- at current rating levels -- will be materially constrained for some time in consideration of a weak forward free cash flow profile and rising financial leverage, two sizeable and nearly concurrent acquisitions, material shrinkage and loss of the dividend income stream from GE Capital, and increasingly aggressive shareholder return initiatives while macroeconomic conditions remain relatively weak and highly volatile," added Solomon.

Nonetheless, affirmation of GE's ratings reflects Moody's view that the long-term strategic benefits of the transaction are sufficiently compelling to mitigate the near-term weakening of the GE's industrial credit profile.

The following rating actions were taken:

Outlook Actions:

..Issuer: General Electric Company

....Outlook, Remains Stable

Affirmations:

..Issuer: General Electric Company

.... Commercial Paper (Local Currency), Affirmed P-1

.... Issuer Rating, Affirmed A1

....Preferred Shelf (Local Currency), Affirmed (P)A3

....Subordinate Shelf (Local Currency), Affirmed (P)A2

....Senior Unsecured Shelf (Local Currency), Affirmed (P)A1

....Pref. Stock Non-cumulative Preferred Stock (Local Currency), Affirmed A3

....Senior Unsecured Commercial Paper (Foreign Currency), Affirmed P-1

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed A1

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed A1



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