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Spotlight on General Electric Capital Corp.: How One Finance ...

  1. 1. Publication date: 06-Jun-2002 Reprinted from RatingsDirect Spotlight on General Electric Capital Corp.: How One Finance Company Is Evaluated Analyst: E. Richard Schmidt, New York (1) 212-438-7403 The diversity of its businesses, its consistently good operating performance, the quality of its acquisition integration, and the strength of its parent company's balance sheet all contribute to Standard & Poor's 'AAA' rating on General Electric Capital Corp. (GECC), according to E. Richard Schmidt, a managing director in Standard & Poor's Financial Services Group. "GECC does have a great deal of diversity, both geographically and by business line, which has helped it maintain stability through a variety of difficult economic environments over the years," Mr. Schmidt said. The company, like other financial institutions, has not been immune from making mistakes, however, including the acquisition of the broker Kidder Peabody & Co. Inc. and exposure to the troubled retailer Montgomery Ward. During the 1990s economic downturn, when commercial real estate values were getting badly hammered, GECC's commercial real estate portfolio also suffered. However, the problems in this sector were more than offset by strong performance in GECC's other diverse business lines. Another factor also helped GECC during the 1990's recession. During that period, bank regulators required banks with loans secured by commercial real estate that had declined in value to classify such loans as nonperforming, thus requiring substantial additional capital support, regardless of the payment status and credit performance on the loan. On the other hand, GECC and other finance companies not subject to bank regulatory oversight would classify such loans as nonperforming only if payments were not contractually current or future payment ability was impaired to the extent that liquidation of collateral might be required. Banks that held performing loans characterized as nonperforming were forced either to increase the capital support for such loans or to sell them in an already distressed commercial real estate market at bargain basement prices. One of the few available buyers of such loans was GECC, whose asset management skills, coupled with the deep discounted purchase prices and low funding cost, enabled it to generate strong returns on these assets over time. This strategy of opportunistically purchasing distressed assets at discounts and managing through the credit risk over time enabled GECC to reap substantial benefits later in the cycle. How Ratings Are Determined Standard & Poor's has an initial review meeting with GECC each year that covers the company's overall performance as well as giving a strategic overview of its various business lines. In addition, Standard & Poor's and GECC have an ongoing dialogue throughout the year. "After the annual overview meeting, at which we briefly discuss the performance and strategy for GECC's 20-plus businesses worldwide, I would then decide which businesses were showing some signs of stress or could be under pressure under the current environment, Mr. Schmidt said. "Subsequent in-depth review meetings would then be scheduled for these business units. For example, we scheduled a discussion with GE Capital Aviation Services Ltd. (GECAS) following the events of Sept. 11th in light of the problems that GECAS's commercial airline customers were experiencing." In addition, Standard & Poor's has visited with many of GECC's offshore operations. GECC's European operations, for example, have grown rapidly through a combination of organic growth and acquisitions. Where the European operating units previously had a dotted-line reporting relationship with their GECC counterpart in the U.S., European operations now have sufficient scale and expertise in place to be managed directly from GE Capital Europe, thus eliminating the
  2. 2. logistics issues of a dotted-line reporting framework. Nonetheless, GECC's culture of strong oversight and accountability remains imbedded throughout the all its units. GECC Acquisitions In terms of the acquisition of Heller Financial Inc., most of Heller's businesses were complementary to those in GECC. For example, Factofrance Heller S.A. is a big factoring operation in Europe, which adds to the relatively small factoring position that GECC has there, thereby furthering GECC's ability to achieve strong market share position in its various businesses. "Outside of the U.S., it takes a bit longer to achieve return-on-investment targets, so the 'two years-or-we're-out-of-here' maxim in the U.S., does not apply to other parts of the world," Mr. Schmidt said. "GECC recognizes that a longer gestation period is required in Europe and Asia to reach appropriate scale and profitability, and it doesn't want to rush into any offshore enterprise unless it fully understands the risks inherent to the particular country and culture." Some acquisitions are "bolt-on" in nature; in other words, they are geared more to the acquisition of a loan portfolio to add economies of scale to an existing business, rather than to the acquisition of a new business infrastructure. GECC has occasionally entered businesses in which they do not have in-house expertise. Some of these cases, such as the Kidder Peabody acquisition, have not worked out well, but others, such as the company's entry into consumer finance in Japan, have been quite successful. "GECC sometimes buys companies for the expertise they provide, as was the case in the company's entry into the life insurance and annuities business, but the oversight and reporting controls are fairly intense," Mr. Schmidt added. GECC looks at potential acquisitions opportunistically, and when reviewing a potential candidate for acquisition, its due diligence process can look "like an army of auditors and analysts going through the operations," said Mr. Schmidt. GECC tends to be a very savvy buyer, understanding the various business risks and pricing the acquisition appropriately. "The 'AAA' rating is a big benefit for GECC in acquiring other companies or loan portfolio," Mr. Schmidt said. "It can really make the transaction work, coupling the low funding cost with expense savings from eliminating duplicate overhead and achieving greater economies of scale." "Standard & Poor's feels reasonably comfortable with GECC's acquisition performance, as they have generally met or exceeded their targets for return on investment within short turnaround times," Mr. Schmidt said. "Top management's scrutiny and analysis of potential acquisitions is also a positive." Disclosure "In terms of disclosure, GECC, a noncaptive finance company subsidiary of an industrial parent, may seem like a mysterious entity to many industrial company analysts, "Mr. Schmidt said. Captive finance companies act as marketing support arms for the parent company, aiding the sale of parent product through various incentive financing plans. Noncaptive finance companies such as GECC, however, are expected to provide good returns commensurate with the risk they are taking. In the current environment of increasing disclosure in financial statements, many analysts who are more familiar with industrial companies do not fully understand what the expanded disclosure information means in terms of risk for a finance company. Questions about the use of special-purpose entities (SPEs) abound, although such vehicles are valuable funding tools within the financial services sector. They can be abused, as has been demonstrated in some cases, but they are one of many tools that Standard & Poor's looks at as available to fund business operations. Finance companies, because of their heavy reliance on the capital markets to fund operations, should have as many available sources as possible to compensate for disruption in one or more sources of funding.
  3. 3. The people on the inside at GECC understand their businesses thoroughly because they are evaluated and accountable as profit centers. "The various businesses are reviewed by General Electric Co. (GE) and GECC management on an ongoing basis to highlight the winners and the losers." Mr. Schmidt said. Management does not hesitate to exit businesses that become unattractive longer term, as witnessed by the decisions to exit the Auto Financial Services business in North America and the residential Mortgage Origination business. The Balance Sheet In first-quarter 2002, there was some question whether GECC's balance sheet was too skewed toward short-term CP. CP had ratcheted up dramatically in fourth-quarter 2001, primarily due to the closing of several sizable acquisitions, including the Heller International deal that closed in October 2001. As is typical in such transactions, funds used at closing come from quickly obtainable CP issuance proceeds, allowing for variation in the final price at closing. Subsequently, this CP is replaced by term debt, but at that time, shortly after September 11th, the capital markets were not very receptive. GECC, like some other companies, ended the year with higher-than-normal short- term debt levels, but has since gone to the term debt markets and reduced its short-term debt exposure. At the same time, GECC, given some turbulence in the capital market, made a strategic decision to reduce the level of CP to the 25%-35% range while also strengthening its CP bank backup lines. "Liquidity is a major concern for finance companies, so anything that they can do to enhance their access to capital markets is highly advisable," Mr. Schmidt said. Comparisons to Competition How does GECC's creditworthiness stack up against that of its competitors? "It's hard to make direct comparisons on a company-to-company basis because of the variety of different business lines at each company," Mr. Schmidt said. "Rather, we have to compare performance between business lines at GECC to like business at its competitors, and that is where the investor demand for greater disclosure has increased. "At the end of the day, however, few companies possess the diversity of GECC, which enables them to suffer setbacks in several businesses but have these setbacks offset by strong performance in other businesses," concluded Mr. Schmidt. "And one cannot forget the support from GE, which offsets the modest capital levels at GECC, and also provides strong management oversight." By Paul Blocklyn This report was reproduced from Standard & Poor's RatingsDirect, the premier source of real- time, Web-based credit ratings and research from an organization that has been a leader in objective credit analysis for more than 140 years. To preview this dynamic on-line product, visit our RatingsDirect Web site at
  4. 4. [18-Apr-2002] General Electric Capital Corp. Page 1 of 11 Return to Regular Format Research: General Electric Capital Corp. Publication date: 18-Apr-2002 Credit Analyst: E. Richard Schmidt, New York (1) 212-438-7403 CREDIT RATING AAA/Stable/A-1+ Outstanding Rating(s) Counterparty Credit AAA/Stable/A-1+ Senior unsecured AAA Commercial paper A-1+ Subordinated Local currency AAA Preferred stock Local currency AA Credit Rating History Dec. 10, 1990 AAA/A-1+ June 19, 1986 AA/A-1+ Sovereign Rating United States of America AAA/Stable/A-1+ Related Entities General Electric Co. Counterparty Credit AAA/Stable/A-1+ Senior unsecured AAA Commercial paper Local currency A-1+ Financial Insurance Co. Ltd. Counterparty Credit Local currency BBBpi GE Capital Mortgage Insurance Corp. (Australia) Pty Ltd. Counterparty Credit Local currency AA/Stable GE Reinsurance Corp. Counterparty Credit Local currency A+/Stable General Electric Capital Services Inc. Counterparty Credit Foreign currency A-1+ Senior unsecured Local currency AAA Commercial paper Local currency A-1+ Heritage Life Insurance Co. Counterparty Credit Local currency BBBpi 10/22/2002
  5. 5. [18-Apr-2002] General Electric Capital Corp. Page 2 of 11 Luxembourg European Reinsurance S.A. Counterparty Credit Local currency AAA/Stable Westwood Life Insurance Co. Counterparty Credit Local currency BBBpi GE Global Insurance Holding Corp. Counterparty Credit Local currency AA/Stable Ellco Leasing Corp. Counterparty Credit AAA/Stable Senior unsecured Local currency AAA Preferred stock Local currency AA Employers Reinsurance Corp. Counterparty Credit Local currency AAA/Stable First Colony Corp. Counterparty Credit Local currency A/Stable GE Capital (Hong Kong) Ltd. Counterparty Credit A/Negative/A-1 Certificate of deposit A/A-1 Senior unsecured Foreign currency A/A-1 GE Capital Australia Funding Proprietary Ltd. GE Capital Australia Ltd. Counterparty Credit AAA/Stable/A-1+ Senior unsecured AAA Commercial paper Local currency A-1+ GE Capital Canada Funding Co. GE Financial Assurance Holdings, Inc. Counterparty Credit Local currency A+/Stable/A-1 Heller Financial Inc. Counterparty Credit AAA/Stable/A-1+ Senior unsecured AAA Commercial paper Foreign currency A-1+ Preferred stock Local currency AA Medical Protective Co. Counterparty Credit Local currency AA/Negative American Mayflower Life Insurance Co. of New York Counterparty Credit Local currency AA/Stable Employers Reassurance Corp. Counterparty Credit Local currency AAA/Stable ERC Life Reinsurance Corp. Counterparty Credit Local currency AAA/Stable 10/22/2002 ...
  6. 6. [18-Apr-2002] General Electric Capital Corp. Page 3 of 11 Factofrance Heller S.A. Counterparty Credit AA/Positive/A-1+ Certificate of deposit Local currency A-1+ Senior unsecured Local currency AA Commercial paper Local currency A-1+ Subordinated Local currency AA- FFRL Re Corp. Counterparty Credit Local currency BBBpi Financial Assurance Co. Ltd. Counterparty Credit Local currency BBBpi First Colony Life Insurance Co. Counterparty Credit Local currency AA/Stable First Specialty Insurance Corp. Counterparty Credit Local currency BBBpi GE Capital Franchise Finance Corp. Counterparty Credit AAA/Stable Senior unsecured Local currency AAA GE Capital Life Assurance Co. of NY Counterparty Credit Local currency AA/Stable GE Edison Life Insurance Co. Counterparty Credit Local currency AA-/Negative GE Frankona Reassurance Ltd. Counterparty Credit Local currency AAA/Stable GE Frankona Reinsurance A/S Counterparty Credit Local currency AAA/Stable GE Frankona Reinsurance Ltd. Counterparty Credit Local currency AAA/Stable GE Frankona Ruckversicherungs Aktien Ges Counterparty Credit Local currency AAA/Stable GE Group Life Assurance Co. Counterparty Credit Local currency AA/Stable GE Life and Annuity Assurance Co. Counterparty Credit Local currency AA/Stable/A-1+ GE Mortgage Insurance Pty Ltd. Counterparty Credit Local currency AAA/Stable General Electric Capital Assurance Co. Counterparty Credit Local currency AA/Stable/A-1+ 10/22/2002 ...
  7. 7. [18-Apr-2002] General Electric Capital Corp. Page 4 of 11 General Electric Mortgage Insurance Corp. Counterparty Credit Local currency AAA/Stable Heller Financial (Mexico) S.A. de C.V. Heller Financial Canada Ltd. Irish European Reinsurance Co. Ltd. Counterparty Credit Local currency AAA/Stable Montgomery Ward Insurance Co. Counterparty Credit Local currency BBpi Professional Insurance Co. Counterparty Credit Local currency BBpi Westport Insurance Corp. Counterparty Credit Local currency AAA/Stable California Insurance Co. Counterparty Credit Local currency A+/Negative Colonial Penn Franklin Insurance Co. Counterparty Credit Local currency AA-/Stable Colonial Penn Insurance Co. Counterparty Credit Local currency AA-/Stable Colonial Penn Madison Counterparty Credit Local currency AA-/Stable Coregis Insurance Co. Counterparty Credit Local currency A+/Negative Federal Home Life Insurance Co. Counterparty Credit Local currency Api Financial Guaranty Insurance Co. Counterparty Credit Local currency AAA/Stable GE Auto & Home Assurance Co. Counterparty Credit Local currency AA-/Stable GE Mortgage Insurance Ltd. Union Fidelity Life Insurance Co. Counterparty Credit Local currency Api Rationale General Electric Capital Corp.'s (GECC) risk portfolio is very diverse, both geographically and by product line, thus enabling the company to maintain consistency in its consolidated profitability throughout the business cycle, despite difficult operating environments in several of its businesses. The global and business-type diversity provides the company with a variety of income sources so that gains in one or several sectors can offset weaker performance in other sectors. GECC experienced strong double-digit earnings growth in four of its five business segments, with the 10/22/2002 ...
  8. 8. [18-Apr-2002] General Electric Capital Corp. Page 5 of 11 strongest performance in Equipment Management and Specialty Insurance. Earnings in the Specialized Financing Segment, however, declined dramatically, heavily influenced by the impact of the weak economy on its core markets in telecommunications, energy, transportation, and industrial. The fastest-growing asset segment in 2001 was Mid-Market Financing, which grew 52% in assets. The October 2001 acquisition of Heller Financial Inc. was a major contributor to this growth. International assets grew 16% to $144.6 billion at the end of 2001; however, international revenues were at $19.7 billion for 2001, a 10% decline from the previous years, which was primarily attributed to the Pacific Basin, which experienced reduced revenues. In 2001, as in previous years, acquisitions have been a major growth engine for GECC, both inside and outside of the U.S. Acquisitions in 2001 totaled $42 billion, $23 billion of which came from Heller International Inc. The company has a long track record of successful execution of acquisitions over a number of years. Profitability targets are quickly achieved, and the integration process has been well executed in most acquisitions. Asset quality measures for GECC's financing receivables remain manageable on a consolidated basis, despite some increases in delinquencies and losses, which is consistent with industry trends. A significant factor in the company's ratings is the strength derived from its ownership by General Electric Co. (senior rating 'AAA') and the continued implicit and explicit support it provides to GECC. General Electric Co.'s capital contribution to GE Capital following the acquisition of Heller International Inc. was a clear demonstration of this support. Standard & Poor's expects that GE Capital's balance sheet will continue to be strengthened in the years ahead. Outlook GECC has maintained consistent profitability from its very diverse family of financial service businesses through effective management of its portfolio risk. The pace of acquisitions has continued to be rapid, but the growth has been integrated and managed successfully, with return-on-investment targets typically achieved in two years or less. The strong support of General Electric Co. continues to provide stability to the current ratings. Profile GECC, indirectly a wholly-owned subsidiary of General Electric Co., is a $381.1 billion asset-diversified finance company operating in five major industry segments: l Consumer Services; l Equipment Management; l Mid-Market Financing; l Specialized Financing; and l Specialty Insurance Consumer Services This segment provides private-label credit card loans, personal loans, retail merchant sales and inventory finance, mortgage servicing, and consumer savings and insurance services. This segment experienced modest 3.5% asset growth in 2001, with strong growth in Global Consumer Finance offsetting a substantial decline in the discontinued Auto Financial Services business. Total assets for Consumer Service were $165.2 billion at year-end 2001 and represented 43% of GECC's total assets. l Auto Financial Services had a 59% decline in assets in 2001. In November 2000, GECC announced its decision to discontinue originating new business in the segment effective December 2000. Future operations will focus on remarketing off-lease vehicles and servicing the remaining portfolio. 10/22/2002 ...
  9. 9. [18-Apr-2002] General Electric Capital Corp. Page 6 of 11 l GE Financial Assurance provides a wide array of insurance, investment, and retirement products for consumers. Products are distributed in North America, Europe, and Asia through intermediaries, a dedicated sales force, financial advisors, and affinity-based marketing. Principal operating unites include GE Capital Assurance Co., Federal Home Life Insurance Co., First Colony Life Insurance Co., and GE Edison Life Insurance Co. Assets grew a modest 4.3% in 2001 to $99.2 billion at year-end. l GE Card Services provides sales finance services in North America, including private-label credit card programs and inventory finance programs for manufacturers, distributors, and retailers. In addition, this segment includes the GE Capital Corporate Card and Purchasing Card products. Assets declined 7.4% in 2001 to $18.2 billion at year-end, reflecting the weak U.S. retail environment. l Global Consumer Finance provides credit services to non-U.S. retailers and consumers. Products include private-label credit cards, consumer loans, auto loans and finance leases, bankcards, and credit insurance. During 2001, the group increased its ownership of Budapest Bank in Hungary to 99%, and acquired igroup Ltd., a U.K. mortgage and debt consolidation lender. Group assets grew a substantial 19.2% in 2001, ending the year at $41.8 billion. l GE Capital Mortgage Services Inc. was engaged in the origination, purchase, sales, and servicing of residential mortgage loans in the U.S. In September 2000, the company decided to exit the business of originating, purchasing, and selling of these loans, and closed on a transaction with a major bank holding company to subservice Mortgage Services servicing portfolio and acquire its servicing facility and mortgage origination business. Equipment Management This segment provides leases, loans, and asset management services for various types of equipment through several business units. In 2002, this segment grew 8.6%, with total assets of $52.2 billion, or 14% of GECC's assets. l GE Capital Aviation Services is a global commercial aviation financial services provider, with a fleet of 1,000 owned and approximately 300 managed aircraft, with more than 200 customers in 60 countries. This segment grew a sizable 33.4% in 2001, ending the year with $23.9 billion in total assets. l GE Capital Fleet Services, a leading provider of corporate fleet management, operates worldwide with approximately 1.2 million cars and trucks under lease and service management. Assets grew 7.4% in 2001, including the $490 million acquisition of Associates Fleet Services in Canada, ending the year at $9.1 billion in assets. l GE Capital Information Technology Solutions, a leading global provider of IT products and services, had year-end 2001 assets of $2.2 billion, a 34% decline from the previous year, reflecting in part its exit from operations in France and the U.K., and market conditions. l Transport International Pool (TIP) and GE Capital Modular Space were consolidated in 2000 to realize cost saving and efficiency through back-office integration. TIP is a global leader in renting, leasing, selling, and financing transportation equipment. GE Capital Modular Space provides rental, lease, and sale of commercial mobile and modular structures. Consolidated assets for this segment were $7.6 billion at year-end 2001, up 4.9% from the previous year. l GE SeaCo. SRL is a joint venture with Sea Container Ltd. and is one of the world's largest lessors of marine shipping containers, with a combined fleet of more than 900,000 units of dry cargo refrigerated and specialized containers for global cargo transport. Total assets at year- end 2001 were $1.3 billion. l Penske Truck Leasing, where GECC is a limited partner, provides full-service truck leasing and rental in the U.S. and Canada, with $4.8 billion in total assets at the end of 2001, up 14.6% from the previous year. The growth reflects the February 2001 acquisition of Rollins Truck Leasing Corp., one of the largest national full-service truck leasing and rental companies, for approximately $2 billion in cash and assumed debt. l GE American Communications, a leading satellite service provider to the broadcast and cable TV industries, was sold to SES S.A., a Luxembourg company, retaining a 30.7% stake in SES Global, a leading satellite company. This investment is now housed in the Structured Finance Group. l GE Capital Rail Services is one of the leading railcar leasing companies in North America, with a fleet of 190,000 railcars in its portfolio, and also offers a variety of services through a 10/22/2002 ...
  10. 10. [18-Apr-2002] General Electric Capital Corp. Page 7 of 11 network of repair and maintenance facilities. Total assets at year-end 2001 were $3.2 billion, up 6.6% from the previous year. Mid-Market Financing This segment offers loans and leases for middle-market customers such as manufacturers, distributors, and end-users for a variety of equipment. Mid-market finance represents 28% of GECC's total assets, growing a substantial 51.7% in 2001 to $108.2 billion in assets. The October 2001 acquisition of Heller Financial was a substantial contribution to this dramatic growth. l Commercial Equipment Financing offers leases and loans to middle-market customers for vehicles, corporate aircraft, and a variety of equipment, with transactions in the $50,000 to $50 million range. Total assets at year-end 2001 were $45 billion, up 27% over the previous year. Much of the growth was due to acquisitions in 2001, including Franchise Financing Corp. of America, Mellon U.S. Leasing, and SAFECO Credit, for a total of $4.4 billion purchase price. l Commercial Finance is a leading global provider of revolving and term debt and equity to finance acquisitions, business expansion, recapitalizations, bank refinancing, and other special situations. Products include asset securitization facilities, bankruptcy-related facilities, and capital expenditure lines, with transactions in the $10 million to $200 million plus range. Total assets were $16.5 billion at the end of 2001, up a modest 6% over the previous year. l Vendor Financial Services provides captive financing services to more than 1,000 equipment manufacturers and more than 4,500 dealer/distributors in North America, Europe, and Asia. Total assets at year-end 2001 were $15.2 billion, a 15% gain over 2000 In June 2001, the company acquired the Manufacturer and Dealer Services business of Mellon Leasing for $480 million. l GE European Equipment Finance, one of Europe's leading diversified equipment lessors, had year-end total assets of $8.5 billion in 2001, growing 25% over the previous year from both originations and acquisitions. l Heller Financial Inc. was acquired in October 2001 and accounted for $22.8 billion in assets at year-end 2001. During 2002, Heller's operations will be reported with the appropriate GECC business segments with which they were combined. In addition, Healthcare Financial Services segment has been established, combining both companies' health care businesses. Overall, Heller Financial provides middle-market financing and is a good fit with GECC's existing business segments. Specialized Financing This segment provides loans and financing leases for major capital assets in diverse industries. It represents 11% of GECC's total assets, growing 9% in 2001, for a year-end result of $40.2 billion. l GE Capital Real Estate provides funds for the acquisition, refinancing, and renovation of commercial and residential properties in North American, Europe, and Asia. Asset management services are also provided as a product line. The unit is one of the world's leading providers of capital and services to the global commercial real estate market, ending 2001 with $20 billion in total assets. l Structured Finance Group makes equity investments and provides innovative specialized financial products and services, including project finance, corporate finance, and acquisition finance, to clients worldwide. Total assets at year-end 2001 were $16.4 billion, a 36% increase over the previous year, primarily from new originations. l GE Equity purchases equity investments in early-stage, pre-IPO companies, with the objective of long-term capital appreciation. The unit ended 2001 with $3.6 billion in assets, a 22% decline from the previous year, indicative of limited acceptable opportunities in the venture capital sector. Specialty Insurance This segment offers financial guaranty insurance and private mortgage insurance, with total assets at year-end 2001 of $13.6 billion, or 4% of GECC's assets. l Financial Guaranty Insurance Co. is an insurer of municipal bonds and also guarantees 10/22/2002 ...
  11. 11. [18-Apr-2002] General Electric Capital Corp. Page 8 of 11 certain taxable structured debt. In-force guaranteed principal (net of reinsurance) was $174 billion at the end of 2001. l GE Capital Mortgage Insurance provides residential mortgage guaranty insurance, with total insurance in force of approximately $184 billion at year-end 2001. Montgomery Ward (Wards) GE Capital acquired control of this retailer in August 1999 when it emerged from bankruptcy reorganization to December 2000 when Wards again filed for bankruptcy protection. The retailer is substantially liquidated. Strategy GECC's continuing strategy is to obtain dominant market share in each of its various businesses, and to enter new businesses and new markets where it can leverage on is existing skills and resources, or provide a service or product that will enhance its ability to meet customer needs. GECC's acquisition track record has been good, with most acquired businesses and portfolios reaching its high- performance targets within two years or less. Performance of acquired businesses has benefited from GECC's funding cost advantage, as well as expense savings and economies of scale resulting from process improvement and consolidation with its existing product lines. In those cases where a new business line or product line is acquired, GECC also acquires experienced management and adopts "best practices" for that business or product line. GECC has also exited businesses that were no longer strategically important, failed to meet profitability targets, or had dim prospects for achieving dominant market share. The company's November 2000 decision to discontinue originating new lease, loan, and commercial transactions in its Auto Financial Services business reflected disappointing performance primarily related to poor lease residual realizations experience. In addition, the company also exited the business of origination, purchasing, and selling of residential mortgage loans because of the commodity–like nature of the business. GE Capital's implementation of the Six Sigma quality initiative has contributed to its product and process quality, and helped moderate expense growth despite substantial acquisition activity, with its accompanying initial expense burden. In addition, the company has been actively engaged in workflow simplification and customer focus facilitated by the Internet, a process referred to as "Digitization." Asset Quality Provision for losses on financing receivables increased 17% in 2001, to $2.31 billion, driven by higher receivables balance, changes in business mix, and higher losses resulting from the sluggish economy. The allowance for losses on financing receivables increased 19% to $4.74 billion, or 2.69% of receivables. Loss coverage (loss reserve/net charge-offs) for 2001 was a comfortable 2.23 times (x). Net charge-offs in 2001 were $2.12 billion, or 1.21% of total receivables, compared with 1.15% the previous year. The increase is consistent with overall industry trends in the difficult economic environment, and loss provisioning has kept pace with the trend. The company is proactive in recognizing and writing down problem accounts as they develop. Consumer financing receivables grew a modest 8.5% in 2001, to $50.8 billion. Nonearning (90 days or more delinquent) consumer financing receivables were 3% of total consumer receivables, a sharp increase from the previous year's level of 2.3%. Consumer charge-offs also increased to 3.15% in 2001, compared to 2.78% the previous year. These increases in nonearners and charge-offs are primarily attributable to the maturing of the private-label credit card portfolios and higher personal bankruptcies in the Japanese credit card portfolios. The nonconsumer financing receivables grew a substantial 28% to $125.2 billion in 2001, largely attributed to several acquisitions including Heller Financial and Franchise Finance Corp. Nonearning and reduced earning accounts for this segment were a manageable 1.4% of outstandings, also reflecting the difficult economic environment. GECC's loans and leases to commercial airlines totaled $21.5 billion at year-end 2001. The events of September 11 coupled with the slow economy negatively affected commercial airline clients, but the company's global marketing capabilities and its relatively newer fleet of aircraft have positioned the 10/22/2002 ...
  12. 12. [18-Apr-2002] General Electric Capital Corp. Page 9 of 11 company to manage through the difficult period. GECC's business and geographic diversity have enabled it to offset problems in some business segments or regions by strong performance in the other segments. The company has a long track record of effective risk management in difficult environments. Profitability Total revenues declined 11% in 2001, as a result of three factors: l The deconsolidation of Wards with the resulting absence of sales in 2002 ($3.2 billion); l The rationalization of operations and exit from some markets by GE Information Technology Solutions ($2.9 billion); and l Reduced surrender fees associated with the planned runoff of restructured insurance policies of Toho Mutual Life Insurance Co. and GE Financial Assurance ($1.2 billion). In addition, 2000 revenues included a $219 million gain from the sale of the company's investment in Paine Webber common stock. Return on average assets in 2001 improved to 1.65% from the 1.34% level in 2000. Expense savings achieved through the Six Sigma process improvement initiatives contributed to the strong net earnings performance, resulting in a 16% reduction in 2001 expenses for 2000, despite the 17% increase in loss provision. Lower interest expense in 2001 also aided the bottom line. Net earnings in 2001 of $5.9 billion represented a 38% improvement over the previous year, with earnings gains in four of the five operating segments. The strongest earning gains were in the Equipment Management segment (up 93% before accounting changes) and Specialty Insurance (up 70% before accounting changes). Consumer Services (up 40% before accounting change) and Mid- Market Financing (up 26% before accounting change) experienced double-digit earnings growth in 2001. Specialized Financing segment earnings declined 52%, the result of reduced asset gains at GE Equity. Asset-Liability Management GECC uses a variety of financial instruments, including interest rate and currency swaps, futures, options, and currency forwards to manage interest rate and currency risk. These derivatives are used solely to manage risk, and the company does not engage in any trading or speculative activities in the derivatives markets. Assets are funded with a mix of variable-rate and fixed-rate debt, managed centrally by the Treasury department in Stamford, Connecticut. Local currency-denominated assets are principally funded with debt denominated in those same currencies. Prepayment risk is hedged using swaps, futures, and option-based financial instruments based on limits on interest rate movement. All counterparty exposures are closely monitored using established credit policies and limits. At Jan. 1, 2001, GECC adopted SFAS 133, Accounting for Derivative Instruments and Hedging Activities, resulting in a reduction in shareholder's equity of $810 million at Jan. 1, 2001. At Dec. 31, 2001, amounts related to derivatives qualifying as cash flow hedges amounted to a reduction of equity of million, of which $560 million was expected to be transferred to earnings in 2002. The announcement that GECC plans to increase its bank backup lines and replace short-term borrowings with longer-dated debt is viewed as prudent given the current nervousness in the overall CP market. GECC has set a target range of 25%-35% CP as a percentage of total debt outstanding by the end of 2002, compared with the current level of about 42%. In addition, CP backup lines are expected to increase from the present $33.5 billion to about $50 billion. Standard & Poor's considers other sources of balance sheet liquidity and funding mechanisms, such as cash and liquid investments, in addition to committed bank lines when evaluating CP backup. The increase in the bank lines and decrease in CP funding bolsters a previously adequate cushion in the event of CP market disruption. GECC's $117 billion CP outstanding at the end of 2001 represented a high proportion of its debt structure, the result of strong fourth-quarter asset growth, particularly the $5.3 billion cash acquisition of Heller International in October 2001. The level of CP will continue to be managed down to substantially lower levels during the course of this year, and was $101 billion at March 31, 2002. 10/22/2002 ...
  13. 13. [18-Apr-2002] General Electric Capital Corp. Page 10 of 11 Capital At year-end 2001, GECC's debt leverage (total debt-to-equity plus reserves) was at 6.35 times (x), quite high for its rating level, using Standard & Poor's generic leverage guidelines, despite a reduction from 6.53x the previous year. On a tangible equity basis, this ratio deteriorated to an extremely high 11.94x, reflecting the substantial $17 billion in intangibles on its balance sheet at year-end 2001, including $14.5 billion of goodwill primarily related to its active acquisition appetite. At year-end 2001, goodwill represented a substantial 46% of GECC's $31.6 billion equity base compared with 39% at year-end 2000. The quality of acquisitions, however, has generally been good, meeting profitability projections within projected time frames, and the integration execution has been good. The high leverage is mitigated by the implicit and explicit support provided by parent General Electric Co., which includes $700 million of subordinated debt guaranteed by GE, and a fixed-charge coverage and debt-to-equity ratio maintenance agreement from GE. In addition, the strength derived from GECC's global business diversity and its dominance in a variety of markets results in a reduced overall risk portfolio. Following the acquisition of Heller Financial Inc., GE Capital received a significant capital contribution from its parent. Over time, it is expected that GECC will be reducing its debt leverage through growth and retention of equity capital. General Electric Capital Corp. Financial Statistics —Year ended Dec. 31— 2001 2000 1999 1998 1997 Receivables NUI (mil. $) 176,044 144,470 139,145 124,330 106,601 Total assets (mil. $) 381,076 332,636 307,441 269,050 228,777 Commercial paper (mil. $) 110,888 88,050 90,518 81,029 67,698 Total debt, inc. nonrecourse debt (mil. $) 230,598 196,258 191,935 165,602 136,814 Total equity (mil. $) 31,563 26,073 22,746 21,069 18,373 Revenues (mil. $) 48,545 54,267 46,605 41,405 33,404 Net income (mil. $) 5,902 4,289 4,208 3,374 2,729 OPERATING Return on average assets (%) 1.65 1.34 1.46 1.36 1.27 Return on average equity (%) 20.48 17.57 19.21 17.11 16.10 Interest coverage (x) 1.78 1.56 1.64 1.53 1.51 Operating exp./avg. revenue (%) 51.47 60.26 58.15 58.04 55.33 CAPITAL ADEQUACY Debt/equity (x) 7.31 7.53 8.44 7.86 7.45 Debt/equity + reserves (x) 6.35 6.53 7.26 6.80 6.46 Debt/equity +reserve - intangibles (x) 11.94 11.66 14.34 13.45 11.68 Debt/equity-intangibles (x) 15.82 15.26 19.84 18.33 15.35 Short-term debt/recourse debt (%) 66.84 59.86 64.12 64.87 67.01 ASSET QUALITY Net losses/receivables (NUI) (%) 1.21 1.15 1.04 1.21 1.35 Loss reserve/receivables (NUI) (%) 2.69 2.75 2.66 2.63 2.63 Loss reserve/net charge- off (x) 2.23 2.39 2.57 2.17 1.95 10/22/2002 ...
  14. 14. [18-Apr-2002] General Electric Capital Corp. Page 11 of 11 Copyright © 1994-2002 Standard & Poor's, a division of The McGraw-Hill Companies. All Rights Reserved. Privacy Policy 10/22/2002 ...