Capital Markets

Losing Luster: GE Ratings Dimmed by S&P

It's long-protected Triple-A becomes AA-plus — for GE Capital as well — days after CFO Sherin made his pitch to the ratings services.
Stephen Taub and Roy HarrisMarch 12, 2009

General Electric Co. finally lost its gold-plated Triple-A rating.

In a widely anticipated move, Standard & Poor’s cut its long-term ratings on GE and units, including General Electric Capital Corp., by one notch to AA-plus from AAA. It also affirmed the A-1-plus short-term credit ratings. Significantly, the rating agency said the outlook is stable.

The action by S&P came one week after General Electric CFO Keith Sherin said in a television interview that he was talking with the ratings services about GE and GE Capital, and discussed for the audience the actions taken to provide “an incredibly strong liquidity position, including $45 billion in cash.” There was “no time bomb in GE Capital,” Sherin had also said on the Squawk Box program on CNBC, one of the GE-owned broadcasting enterprises.

S&P explained in today’s rating move on GE that the main factor in the downgrade was its assessment of the stand-alone credit profile of financial services unit GECC. “We believe that GECC is under increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe,” said Standard & Poor’s credit analyst Robert Schulz. “This will result, in our opinion, in rising credit losses across key segments of GECC’s finance portfolio.”

On the other hand, S&P said that GE’s industrial-based cash generation capabilities remain “fundamentally strong,” even in the face of enormous global economic headwinds, and that it will generate growing cash balances from current levels over the next two years. “We do not anticipate that GE will benefit from any meaningful earnings or cash flow from GECC through 2010,” S&P added.

More specifically, S&P said that it expects GE’s industrial businesses to generate about $2 billion in discretionary cash flow (after dividends) in 2009 and a significantly greater amount in 2010, aided by the 68 percent reduction in the common dividend that the company recently announced.

“The ratings on GE continue to reflect our view of its excellent business risk profile, its significant cash flow and liquidity, its strong corporate governance, and management’s commitment to maintaining very high credit quality,” it added. “In our view, the company has a track record of managing its businesses (including its financial services unit GECC) in a variety of difficult markets, and a demonstrated ability for these businesses to earn solid profits and generate substantial cash, even in very tough economic conditions.”

However, S&P did warn that it could reexamine the GE outlook if, for example, the rater came to believe that GE would fail to generate discretionary free cash flow (after dividends) of around $2 billion in 2009 and significantly more in 2010 and retain a very substantial portion of this cash.

It would also review the outlook, or its rating, if S&P came to expect that GECC would report significant losses for an extended period of time, if the company shifted its financial policies, or if strategic shifts in GE’s portfolio of businesses were to jeopardize the company’s excellent business risk profile, S&P added in its report this morning.

Late last month, GE cut its dividend by 68 percent. Meanwhile, GE Capital recently sold $8 billion in bonds backed by the FDIC.

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