S&P Places Baker Hughes (BHI) on CreditWatch Positive
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S&P Global Ratings said today that it placed its 'A' long-term and 'A-1' short-term corporate credit ratings on Baker Hughes (NYSE: BHI) on CreditWatch with positive implications.
We also placed our 'A-1' commercial paper rating and our 'A' issue-level rating on the company's senior unsecured debt on CreditWatch positive.
General Electric Co. (GE) has announced plans to combine its oil and gas assets with BHI into an LLC partnership structure. Another entity, the newly-created Baker Hughes, a GE company, will control the partnership. GE will have a 62.5% financial interest in the LLC partnership and also 62.5% voting interest in this new public company, while public shareholders will control the remaining 37.5% voting interest. "The CreditWatch placement reflects the likelihood that we will raise our ratings on BHI following the close of the transaction," said S&P Global Ratings' credit analyst Paul Harvey.
We anticipate that the LLC will have approximately $32 billion in short- and long-cycle oil field services revenue. In addition to contributing its oil and gas assets, GE will also fund $7.4 billion of cash dividends to BHI's shareholders by assuming $7.4 billion of debt from the company's legacy financial services entity. BHI's existing debt will become an obligation of the LLC, though it will not be guaranteed by GE. We expect the transaction to close in mid-2017.
Our initial expectation is that we would assign a long-term corporate credit rating to the LLC that is one notch below our current corporate credit rating on GE to reflect our conclusion that the new entity would be considered a highly strategic entity in the GE group. Currently, this implies an 'A+' rating on the LLC. Factors we considered include our view that it is highly unlikely GE will try to sell the LLC after the transaction closes; that it will operate business lines that are integral to GE--with close linkages to the company's name and brand; and that it will be reasonably successful at what it does. We expect to formalize our view of the LLC in 2017 as the transaction moves closer to completion.
As a result, we expect to raise the rating on BHI to 'A+' from 'A', reflecting its transition into the new company (Newco). Newco will benefit from the combination of the GE and BHI assets, improving scale of operations, product and market diversity, and potential synergies gained through both the transaction and relationship with GE.
If the transaction is completed as proposed, we expect to raise the corporate credit rating on BHI to 'A+', the same as the expected rating on the proposed joint venture. We expect to resolve the CreditWatch placement when the transaction closes, which is expected to take place in mid-2017.
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