Fitch Ratings downgraded the long- and short-term issuer default ratings (IDRs) for General Electric (GE) and GE Capital Global Holdings (GE Capital) to ‘A+’ and ‘F1’ from ‘AA-‘ and ‘F1+’. The rating outlook is negative.

Fitch said the downgrade of GE’s ratings considers the deterioration in the company’s operating and financial performance including a slower return to higher margins and stronger free cash flow than previously anticipated by Fitch. GE’s performance is being affected by secular changes in the Power segment’s gas turbine business that has reduced long term prospects for growth. Fitch believes the company will maintain a strong balance sheet and a high level of financial flexibility which considers a smaller albeit sizeable GE Capital, but more in line with the new rating. GE is becoming less diversified as it realigns its businesses, but overall diversification remains meaningful.

The negative outlook incorporates concerns about the pace at which GE returns to stronger free cash flow (FCF); the extent of restructuring required to reduce the company’s cost structure and increase margins in the Power, Renewable Energy and Oil & Gas segments; and structural changes at the Power segment including industry overcapacity, the growing role of energy efficiency, and a shift toward renewable energy. GE has identified several actions that should improve its operating performance, but the implementation could occur over an extended period and Fitch believes there are numerous execution risks. Cash flow available to the industrial business will be reduced through at least 2018 by the suspension of dividends from GE Capital while it reviews its insurance reserves.

The outlook could return to stable if GE executes its plans to realign its business portfolio and rebuild profitability. Other important developments to stabilizing the rating outlook include achieving a lower cost structure in the Power business within the next one to two years, realizing positive FCF after dividends in 2018 with solid prospects for further improvement, reducing leverage from levels which Fitch expects could increase in the near term before improving in 2019, reducing net investment in contract assets, and maintaining competitive positions in GE’s industrial markets.

Fitch still views GE’s overall enterprise risk as relatively low, reflecting its global presence, broad product portfolio, strong market positions, and substantial services revenue which generates solid margins and typically is less cyclical than GE’s equipment revenue. GE’s large scale and access to capital markets provide considerable financial flexibility to execute its operating strategies.