General Electric Company GE announced the commencement of the realignment and reorganization of GE Capital’s businesses. The strategic restructuring plan was announced on Apr 10, 2015 under which the industrial giant intended to shrink its huge finance arm and deepen its focus on investment and growth in its core industrial operations.
Under the restructuring, GE will split GE Capital’s U.S. and international operations, with the latter being consolidated into a new international holding company — GE Capital International Holdings. GE Capital International Holdings will have a separate capital structure and will be supervised by the U.K. Prudential Regulation Authority.
Meanwhile, GE Capital’s U.S. operations shall be consolidated under a new U.S. holding company named GE Capital US Holdings, Inc.
Also, in order to comply with the debt covenants under the GE Capital restructuring scheme, GE Capital will merge into GE today. Post-merger, all of GE Capital’s outstanding debt obligations will be assumed by GE.
GE Capital will be replaced by a new U.S. intermediate holding company — GE Capital Global Holdings — as the holding company of GE Capital’s operations and will become the holding company of GE Capital US Holdings and GE Capital International Holdings.
These steps represent crucial milestones on GE’s course toward rendering itself free of its designation of a systemically important financial institution that it intends to apply for in the first quarter of 2016.
GE decided to trim down GE Capital, the parent unit of its real estate business, after the division’s lack of access to credit during the 2008 financial crisis endangered the stability of the parent company. The present-day stringent regulatory framework that emerged in the wake of the economic crisis, which requires higher capital ratios and restricts risky loans, had weighed on GE Capital’s profitability to a great extent.
Eventually, the division’s incapability to boost margins and its negative impact on the rest of the company led CEO Immelt to commence a landmark staggered sale of GE Capital operations worth over $200 billion, over a period of two years.
GE has already sold large chunks of its financing business including commercial real estate, healthcare finance and transportation finance operations. Post completion of the exit strategy, GE expects to derive about 90% of its annual earnings from industrial businesses. GE plans to retain GE Capital’s financing verticals that relate to GE’s industrial businesses.
GE presently carries a Zacks Rank #3 (Hold). Some better-ranked conglomerates that look promising now include Compass Diversified Holdings CODI, Federal Signal Corp. FSS and Macquarie Infrastructure Corporation MIC, each sporting a Zacks Rank #2 (Buy).
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