Capital Markets

GE Scrambles to Keep AAA Rating

The parent company slashes its dividend from GE Capital from 40 percent to 10 percent of GE Capital's earnings suspends the current GE stock buyback.
Stephen TaubSeptember 25, 2008

General Electric has taken several tough steps to defend its Triple-A credit rating.

The huge conglomerate said today that it would further reduce its financial services leverage and strengthen its capital and liquidity. That was part of a larger announcement in which GE ratcheted downward its earnings guidance for the third quarter and full year in view of the volatility in the financial services markets.

GE also said it would suspend its current stock buyback, though it assured that it would maintain its annual dividend through 2009.

In response, both Moody’s and Standard & Poor’s affirmed their ratings of the company. Even so, the early-morning announcement sent stock futures plummeting for a short time.

In a bid to reaffirm its longstanding commitment to its Triple-A credit rating, GE said it would boost capital in GE Capital to reduce leverage ratios. That will be accomplished by reducing GE Capital’s dividend to the parent company from 40 percent to 10 percent of GE Capital’s earnings and by suspending the current GE stock buyback.

“With a strong liquidity position and having already completed $70 billion in long-term funding year-to-date, GE Capital does not need to raise any additional long-term debt for the remainder of 2008,” it assured.

However, despite strong demand, the company said, it is reducing GE Capital’s commercial paper to 10 percent to 15 percent of GE Capital’s total debt going forward. It did not say what the current percentage is.

It also said it is resizing GE to deliver a 60 percent to 40 percent industrial-financial services earnings split by the end of 2009. Again, it did not disclose the current mix.

Also, GE said it plans to maintain the quarterly dividend of 31 cents per share, totaling $1.24 per share annually, through the end of 2009.

“We run the company for the long term and are taking the actions expected from a Triple-A-rated company,” said chairman and CEO Jeff Immelt. “Given the recent dramatic developments in the financial markets, we have made some tough decisions to further reduce risk and strengthen our balance sheet while maintaining our dividend.”

In response to this announcement, Standard & Poor’s affirmed its ‘AAA’ long-term and ‘A-1+’ short-term corporate credit ratings on General Electric Co. and on General Electric Capital Corp. and its ‘A-1+’ short-term rating on General Electric Capital Services Inc. The outlook on GE and GECC is stable, it added.

“Crucial to the rating affirmation, in our view, are the steps GE intends to take to reduce financial risk at GECC,” said Standard & Poor’s credit analyst Robert Schulz.

Moody’s said GE’s planned actions to address the additional risks resulting from the heightened volatility in the global capital markets “are appropriate and necessary.”

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