Capital Markets

What’s That Again? S&P Goes Negative on GE

Rating agency says the long-time AAA rating at the vaunted company, the biggest issuer of corporate bonds, could be vulnerable within two years.
Stephen TaubDecember 18, 2008

Sending an jolt to long-time investors in General Electric Co., Standard & Poor’s revised its outlook on GE and units that included GE Capital Corp. — moving to negative from stable on its AAA-rated debt.

It further warned that S&P may downgrade the company from the exalted AAA level within two years. As the credit rating agency put it, there is at least a one-in-three possibility of a downgrade over that period.

S&P added, however, that GE’s commitment to maintaining the highest credit quality; the still-solid prospects for many of its business segments, even in light of developing economic weakness; and the company’s ample financial flexibility should continue to support its ratings.

“The negative outlook is based partly on the concerns regarding GECC’s future performance and funding,” said S&P credit analyst Robert Schulz. “In addition, fundamentals-based earnings and cash flow could decline sufficiently during the next two years to warrant a downgrade. We will continue to monitor GECC’s success in executing on its funding and liquidity plans in light of capital market turmoil.”

GE shares declinded 8.2 percent, to $15.96, in afternoon trading, while credit default swaps on GE Capital rose 20 basis points to 415 basis points, after reaching a one-month low of 395 earlier in the day, Bloomberg News reported, citing broker Phoenix Partners Group. Bloomberg noted that GE is the biggest issue of U.S. corporate bonds.

S&P said it affirmed GE’s rating, despite the shift to a negative outlook, because of the conglomerate’s massive scale, diversity, and track record of managing its businesses — including its financial services unit GECC — in a variety of difficult markets. The rating agency also cited the demonstrated ability of GE businesses to earn solid profits and generate substantial cash, even in very tough economic conditions. It credited GE for not remaining static in the face of negative economic and capital market conditions that it predicted will persist in 2009.

“Its recent financial policy actions have been consistent with what we would expect of a company with the highest credit quality: raising equity and eliminating shareholder-friendly uses of cash,” such as share repurchases, dividend increases, and major acquisitions, said the S&P report. It added that the downsizing of GECC and the increase in liquidity resources available to GECC are other important factors in the affirmation.

S&P noted that GECC will account for about one third of GE’s earnings in 2009–or less if worse-than-expected credit losses further reduce GECC’s earnings. “GECC remains one of the world’s most profitable and highly rated financial institutions,” it added.