OREANDA-NEWS. Fitch Ratings has published 'AA-/F1+' Long - and Short-Term Issuer Default Ratings (IDRs) for General Electric Company (GE) and GE Capital Global Holdings, LLC (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.

A full rating list appears at the end of this release.

STABLE OUTLOOK

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.

KEY RATING DRIVERS - GE Industrial

The ratings for GE incorporate the company's global presence, broad product portfolio, large market shares in its core infrastructure and healthcare markets, and strong technological capabilities. Substantial services revenue generates more than 80% of GE's industrial operating profit and dampens the impact on financial results from volatility in the company's energy and capital goods end-markets. Some credit protection measures are weak for the rating, but Fitch believes GE's strong operating profile and financial resources give it a low overall enterprise risk. GE's large scale and market position give it a broad perspective on industry developments, the capacity to invest in new technologies, and adjust market trends. When the divestiture of GE Capital's non-core businesses is completed GE's industrial businesses will represent at least 90% of consolidated earnings compared with less than 50% several years ago when GE Capital was larger.

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's industrial business portfolio is now largely aligned with the company's focus on infrastructure markets, reflecting a series of acquisitions and divestitures. The evolution of GE's business mix should complement the company's increasingly important digital strategy. Integration and restructuring costs will pressure profitability this year following the acquisition of Alstom in late 2015, although GE also will recognize large gains including the divestiture of its non-core appliance business in June 2016. Fitch expects margins will recover after 2016 as GE realizes operating synergies and further reduces corporate costs.

Rating concerns include potential support required for GE Capital albeit much lower than in the past, large net pension liabilities, the risk that future larger-than-expected share repurchases or acquisitions could weaken GE's currently strong financial profile, and cyclicality in GE's infrastructure markets. However, Fitch believes future acquisitions will be targeted toward adjacent industrial markets and that GE will be disciplined in its cash deployment for acquisitions or share repurchases. Other concerns include the typical large intra-quarter use of commercial paper and the high dividend payout which affects free cash flow as defined by Fitch. Rating concerns are offset by GE's diversification, significant financial resources, and steady operating performance through business cycles compared to its industrial peers.

GE's financial leverage at March 31, 2016 included total adjusted debt/EBITDAR of 1.7x (2.5x including an adjustment to include customer receivables factored through GE Capital that totaled $13 billion at Dec. 31, 2015). Fitch estimates total adjusted debt/EBITDAR will remain near the current range as acquired earnings at Alstom offset weaker results in the Oil & Gas segment and the loss of earnings from GE's appliance business. Fitch's calculation of leverage would be lower when including earnings from GE Capital which Fitch excludes from EBITDA in order to focus on industrial credit metrics.

Leverage would be higher if GE's intra-quarter use of commercial paper were included. The company repays most commercial paper at quarter-ends as part of its working capital management. A portion of the repayment is funded temporarily from cash located outside the U. S., which Fitch does not typically include as available cash due to tax liabilities that could be incurred if the cash is repatriated. GE's industrial business maintained total cash balances of $10.4 billion at the end of 2015 compared to $500 million of commercial paper balances.

GE typically generates strong cash flow from operations. Fitch estimates operating cash flow in 2016 could be approximately $12 billion-$13 billion, excluding dividends from GE Capital, compared to more than $10 billion in 2015 which included nearly $2 billion usage for working capital. Fitch estimates FCF after dividends in 2016 could be slightly positive. Fitch's calculation of FCF is after pension contributions and excludes dividends from GE Capital. It also excludes changes in receivables sold to GE Capital. Corporate dividends to shareholders represent a large use of operating cash flow and contribute to GE's low FCF compared to some other large industrial companies.

Fitch also considers GE's cash flow metrics adjusted to include dividends from GE Capital as GE Capital is a significant contributor to GE's consolidated financial results and valuation. Fitch estimates these dividends, excluding one-time large dividends in the near term, could be approximately $1 billion annually after the GE Capital exit is completed.

Over the next two to three years, Fitch expects FCF will be reduced by large pension contributions to the GE Pension Plan, including approximately $2.1 billion required in 2017. At the end of 2015, GE's pension plans were approximately 75% funded on a PBO basis, excluding the unfunded GE Supplemental plan. No contributions to the GE Pension Plan were required in 2014 or 2015 and are not required in 2016. GE expects to contribute $250 million to the GE Supplementary Pension Plan and for administrative expenses on its principal plans in 2016. It expects to contribute $930 million to its other pension plans.

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.

GE's $10 billion acquisition of Alstom's thermal, renewables and grid businesses is consistent with GE's strategy to focus on its strengths in industrial infrastructure. Alstom's substantial installed base boosted GE's services revenue, particularly in the Power business where GE's services backlog increased by approximately 23% to $63 billion following the acquisition. Alstom's project portfolio included a $29 billion equipment and services backlog, and its electrical grid businesses expanded GE's global scale in utility and industrial markets. Some of Alstom's businesses were contributed to three joint ventures (grid technology, renewable energy, and global nuclear and French steam power) to which GE contributed its Digital Energy business. Fitch believes GE should achieve its targeted annual cost synergies associated with the acquired Alstom businesses of $3 billion over five years, including $1.1 billion in 2016, partly offset by $1.9 billion of total implementation costs.

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.

Most of GE's other businesses should see higher sales in 2016, particularly the Power, Renewables and Aviation segments, which are benefiting from shifts associated with environment concerns (Power and Renewables) and high backlogs in commercial aerospace (Aviation). Sales in the Transportation segment likely will decline due to lower freight volumes at its rail customers and by comparison with a solid year in 2015. Concerns about cyclicality are mitigated by GE's low earnings volatility, considerable financial flexibility, large installed base of equipment, high-margin services business, and a substantial backlog which can be expected to contribute to GE's future earnings, cash flow and financial flexibility.

KEY RATING DRIVERS - GE Capital

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 Dec. 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 Dec. 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 General Electric Capital Corporation into GE, and exchanged $36 billion of legacy General Electric Capital Corporation 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 Limited, remains supervised by the U. K. 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 2Q'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 leverage ratio, defined by Fitch as gross debt to tangible equity (total shareowners' equity plus preferred equity less goodwill and other intangible assets) was 4.5x as of June 30, 2016, compared to 5.2x as of Dec. 31, 2015 and 4.1x as of Dec. 31, 2014. Company-reported gross debt to equity (gross debt less liquidity divided by shareowners' equity) was 4.1x as of June 30, 2016, down from 4.6x as of Dec. 31, 2015 and 4.0x as of Dec. 31, 2014. Fitch expects this leverage ratio to remain within the 4.5x-5.0x range over the next two years, now that the D-SIFI designation has been rescinded. Fitch tends to focus on gross debt leverage ratios; however, company-reported net debt to equity was 2.5x as of June 30, 2016, down from 2.6x as of Dec. 31, 2015 and 3.1x as of Dec. 31, 2014.

While current and future leverage ratios are viewed as higher than Fitch's quantitative benchmarks for a standalone finance and leasing company rated 'AA-', the GE guarantee on GE Capital's debt and GE's ability to provide support to GE Capital offset the standalone leverage ratio.

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 Inc. reflects the credit support provided by GE Capital, and thus GE, to GE Capital EFS Financing Inc. The 'F1+' rating for GE Capital Treasury Services LLC 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 Co. 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.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for GE Industrial include:

--Organic revenue grows by low single digits in 2016 as higher sales in the Power, Aviation and Renewables segments more than offsets lower sales of locomotives and a large decline in the oil and gas segment.

--EBITDA margins in 2016 decline due to the negative impact of the Alstom acquisition. Margins improve after 2016 due to benefits from the integration of Alstom, lower restructuring costs, and ongoing cost improvements.

--The GE Capital Exit Plan is completed as planned.

--Large dividends from GE Capital are used to fund share repurchases in the next two to three years as part of the GE Capital Exit Plan.

--Alstom integration contributes to cost synergies, including $1 billion in 2016.

--GE generates positive FCF.

--Cash deployment prioritizes acquisitions over share repurchases.

Fitch's key assumptions within the rating case for GE Capital include:

--GE Capital's outstanding debt will remain explicitly guaranteed by GE.

--GE Capital will pay $18 billion in dividends to GE in 2016.

--GE Capital's gross debt to tangible equity calculated by Fitch and GE Capital's company-reported gross debt to equity (gross debt less liquidity divided by shareowners' equity) will remain around 4.5x-5.0x over the Outlook horizon.

--The company will complete the exit plan by year-end 2016 with ENI remaining around $80 billion.

RATING SENSITIVITIES

GE Industrial

Future developments that may, individually or collectively, lead to a negative rating action include:

--GE directs its operating strategy away from its industrial businesses;

--Market shares decline materially;

--Services generate a consistently lower proportion of revenue and profit;

--EBITDA margins fail to recover following an expected decline in 2016;

--GE Capital's asset quality and liquidity are weaker than expected, resulting in lower dividends to, or requiring support from, GE.

--GE's financial strategy becomes more aggressive than expected, including debt-funded acquisitions or share repurchases that lead to consistently higher leverage, including total adjusted debt/EBITDAR sustained above 2.0x (above 3.0x including Fitch's adjustments for factored receivables), or funds from operations (FFO) adjusted leverage sustained above 2.2x (above 3.2x including Fitch's adjustments for factored receivables).

Future developments that may, individually or collectively, lead to a positive rating action include:

--Segment margins increase toward 20% on a sustained basis.

--FCF and liquidity are sufficient to reduce GE's average commercial paper usage well below $10 billion.

GE Capital

As long as GE Capital's outstanding debt remains explicitly guaranteed by GE, Fitch cannot envision a scenario where GE Capital's ratings would not be equalized with those of GE. If in the future, GE Capital or its subsidiaries were to issue (or signal their intention to issue) debt that did not benefit from an explicit guarantee from GE, Fitch would consider the degree of strategic importance of GE Capital to GE and the willingness and ability of GE to extend financial support to GE Capital in determining the ratings of GE Capital and its debt obligations. Since the ratings of GE Capital and its rated subsidiaries are linked to those of GE, the rating sensitivities for GE Capital are the same as those listed above for GE Industrial.

LIQUIDITY AND DEBT STRUCTURE

GE Industrial's liquidity at June 30, 2016 included cash of $10 billion. Most of GE's cash is held outside the U. S. and is subject to income taxes if repatriated. Average cash and debt balances are higher than reported at quarter-ends due to GE's use of commercial paper. Commercial paper typically is highest during intra-quarter periods and is substantially repaid before quarter-ends using overseas cash. Liquidity also included $20 billion of credit lines exceeding one year. GE Capital has indirect access to the lines through intercompany loans from GE Industrial.

At March 31, 2016, GE Industrial's liquidity was offset by nearly $3.4 billion of debt due within one year, excluding amounts assumed from GE Capital. GE's industrial debt totaled $19.4 billion and included approximately $15 billion of notes due between 2017 and 2044.

GE Capital has strong liquidity and financial flexibility. GE Capital had $56 billion of liquidity as of June 30, 2016 and its next 24 months liquidity coverage ratio, defined as cash, bank line availability and readily available investment securities divided by debt maturities is 171%. Additionally, 96.8% of GE Capital's debt funding was unsecured as of June 30, 2016. GE Capital's commercial paper outstanding as of June 30, 2016 totaled $5 billion or 4.9% of total funding.