Fitch: No Current Impact on Mubadala GE Capital's Ratings from GE Asset Sales
Fitch does not envision any imminent decrease in the financial commitments of either of the joint venture's (JV) partners. However, we believe that the GECC divestiture raises questions about MGEC's long-term strategic direction.
MGEC's Long-term Issuer Default Rating (IDR) is notched down by three notches from that of Mubadala and takes into account Fitch's view of GECC's strong investment grade credit quality. MGEC's rating reflects Fitch's opinion that the owners have substantial capacity to support it in case of need. Fitch also considers there is a strong propensity to provide support, illustrated by MGEC's dual branding and the active involvement of senior management representatives from both shareholders, offset to some extent by the JV nature of the ownership structure.
As of its most recently reported figures (year end 31 December 2014), MGEC was delivering profitable growth in line with the shareholders' expectations. Notwithstanding the GE announcement, MGEC has stated that there are no current plans to change the shareholding or strategy of the business, referencing its importance as a component of the Mubadala-GE partnership.
MGEC currently invests in senior secured loans and leases to middle market companies and commercial real estate finance. Almost all business is sourced from GECC, which has enabled MGEC to grow relatively quickly in five years by leveraging off GECC's hitherto very strong position in the middle market commercial finance sector (globally, especially in North America). At 31 December 2014, MGEC's assets totalled USD5.5bn, supported by USD886m of equity and a further USD2.9bn of related party loans, of which Mubadala and GECC have consistently maintained equal commitments.
Fitch regards MGEC's asset quality to date as sound. However, in the light of GE's announcement that it intends over the next 24 months to reduce the scale of GECC's operations to those financing verticals that relate to GE's industrial assets (aviation financial services, energy financial services and healthcare equipment finance), thereby disposing not only of its real estate assets but also "most of the commercial lending and leasing segment", it is as yet unclear to Fitch how MGEC's asset portfolio will be originated and grown in the future. We believe that longer term, there are a variety of potential outcomes, including (but not limited to):
-- MGEC conducting a greater volume of its own loan origination;
-- The sale of GECC's interest in the JV (either with or without the remainder of GECC's middle market assets) to a new strategic partner; and
-- An orderly wind-down of the JV, leading either to the sale of MGEC's assets or their run-off over time.
MGEC's ratings would remain at their current level if the company is able to demonstrate consistent underwriting, measured growth and appropriate capitalisation as a result of conducting originations on its own or with an acceptable replacement strategic partner. Conversely, MGEC's ratings could be negatively affected by an increased risk appetite and/or the introduction of a materially weaker or less experienced strategic partner. Were the JV to be put into run-off, Fitch's rating analysis would consider the expected pace of the run-off, the commitment of the JV partners over the run-off period and the performance of the underlying investments.
Fitch does not have any specific knowledge of discussions between MGEC and its shareholders on these or other options and therefore has no firm opinion as to their relative likelihood. Fitch's views of the impact on MGEC's credit strength of any further developments in the company's operating model will remain highly dependent on their nature.
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