GE 2008 Annual Report Download - page 45

management’s discussion and analsis
ge 2008 annual report 43
Qualitative measures include:
Þ Franchise strength, including competitive advantage and
market conditions and position
Þ Strength of management, including experience, corporate
governance and strategic thinking
Þ Financial reporting quality, including clarity, completeness
and transparency of all financial performance
communications
GE Capital’s ratings are supported contractually by a GE commit-
ment to maintain the ratio of earnings to fixed charges at a
specified level as described below.
Beyond contractually committed lending agreements, other
sources of liquidity include medium and long-term funding,
monetization, asset securitization, cash receipts from our lending
and leasing activities, short-term secured funding on global
assets and potential sales of other assets.
PRINCIPAL DEBT CONDITIONS are described below.
The following conditions relate to GE and GECS:
Þ Swap, forward and option contracts are required to be executed
under standard master agreements containing mutual down-
grade provisions that provide the ability of the counterparty
to require assignment or termination if the long-term credit
rating of the applicable GE entity were to fall below A–/A3. In
certain of these master netting agreements, the counterparty
also has the ability to require assignment or termination if the
short-term rating of the applicable GE entity were to fall below
A–1/P–1. The fair value of our exposure after consideration of
netting arrangements and collateral under the agreements
was estimated to be $4.0 billion at December 31, 2008.
Þ If GE Capital’s ratio of earnings to fixed charges, which was
1.24:1 at the end of 2008, were to deteriorate to 1.10:1, GE
has committed to contribute capital to GE Capital. GE also
guaranteed certain issuances of GECS subordinated debt
having a face amount of $0.8 billion at December 31, 2008
and 2007.
Þ In connection with certain subordinated debentures for which
GECC receives equity credit by rating agencies, GE has agreed
to promptly return to GECC dividends, distributions or other
payments it receives from GECC during events of default or
interest deferral periods under such subordinated debentures.
There were $7.3 billion of such debentures outstanding at
December 31, 2008.
The FASB currently has a project on its agenda that reconsiders
the accounting for VIEs and securitization. While final guidance
has not yet been issued, it is likely that the Board will eliminate
the scope exclusion in FASB Interpretation (FIN) 46(R) related to
QSPEs, which would result in consolidation of a majority of the
QSPEs we use for securitization. In addition, proposed changes
in the criteria for derecognition of financial assets will signifi-
cantly reduce the number of securitizations that qualify for off-
balance sheet treatment and gain recognition. A revised standard
is expected to be issued later in 2009 and could be effective for
our 2010 financial statements. Further information about our
securitization activity and our involvement with QSPEs is provided
in Note 30.
Debt Instruments, Guarantees and Covenants
The major debt rating agencies routinely evaluate our debt. This
evaluation is based on a number of factors, which include finan-
cial strength as well as transparency with rating agencies and
timeliness of financial reporting. In December 2008, Standard &
Poor’s Ratings Services affirmed our and GE Capital’s “AAA” long-
term and “A–1+” short-term corporate credit ratings but revised
its ratings outlook from stable to negative based partly on the
concerns regarding GE Capital’s future performance and funding
in light of capital market turmoil. On January 24, 2009, Moody’s
Investment Services placed the long-term ratings of GE and
GE Capital on review for possible downgrade. The firm’s “Prime-1”
short-term ratings were affirmed. Moody’s said the review for
downgrade is based primarily upon heightened uncertainty regard-
ing GE Capital’s asset quality and earnings performance in future
periods. Various debt instruments, guarantees and covenants
would require posting additional capital or collateral in the event
of a ratings downgrade, but none are triggered if our ratings are
reduced to AA–/Aa3 or A–1+/P–1 or higher. Our objective is to
maintain our Triple-A rating, but we do not anticipate any major
operational impacts should that change.
GE, GECS and GE Capital have distinct business characteristics
that the major debt rating agencies evaluate both quantitatively
and qualitatively.
Quantitative measures include:
Þ Earnings and profitability, revenue growth, the breadth and
diversity of sources of income and return on assets
Þ Asset quality, including delinquency and write-off ratios and
reserve coverage
Þ Funding and liquidity, including cash generated from operating
activities, leverage ratios such as debt-to-capital, retained cash
flow to debt, market access, back-up liquidity from banks and
other sources, composition of total debt and interest coverage
Þ Capital adequacy, including required capital and tangible
leverage ratios