GE loses its top rating
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Reuters
Oluşturulma Tarihi: Mart 14, 2009 00:00
NEW YORK - Standard & Poor's strips General Electric of its top credit rating, citing weak perormance of the giant company’s financial unit. After the downgrade, just four nonfinancial companies have top marks from S&Pand Moody’s
General Electric was stripped of its AAA credit rating by Standard & Poor's, which cited the performance of GE's finance unit, but its shares rose 12.7 percent on Thursday as investors breathed a sigh of relief the cut was not deeper.
S&P said a sharp deterioration in world economies would lead to rising credit losses across GE's finance portfolio. However, S&P raised its outlook to stable from negative.
"We're expecting really no earnings and no cash flow for GE Capital this year or next year," said S&P analyst Robert Schulz in an interview. "Now that we're at a lower rating, we think that 'stable' was more appropriate."
S&P lowered its outlook on GE's ratings to "negative" in December. A month later, Moody's Investors Service took a stronger step, putting its ratings on review for possible downgrade. Moody's put GE on review on Jan. 28 and typically tries to complete its reviews within 90 days.
Their stance was unchanged even after the firm cut its dividend by 68 percent in a move to save $9 billion a year. "It's good to see it not drop lower, and it's heartening to see that the outlook is stable. The ratings agencies can see more of that portfolio (than the average investor)," said Daniel Holland, equity analyst at Morningstar in Chicago. "Back in December when they flipped to negative, pandemonium broke loose, so it's good to see them to go stable."
GE stock, the last original component to remain in the Dow Jones industrial average, jumped $1.08 to close at $9.57 on the New York Stock Exchange Thursday, reaching its best level since Feb. 19 and helped boost the overall stock market.
Spreads for GE's 5.625 percent notes due in 2017 - the most actively traded corporate bond on Thursday - narrowed over Treasuries. The cost of insuring debt of GE's finance arm against default fell.
Attention turned to next week's investor meeting, in which GE could revise lower its profit target for the finance unit.
"Management will provide more details on its balance sheet stress test, which will likely focus on the triggers for rising credit losses and further asset value impairments," Deutsche Bank analyst Nigel Coe wrote in a research note.
GE, in a statement released just after the downgrade to AA-plus, said it does not anticipate significant operational or funding impact, and said it is one of the only financial services companies with a rating as high as AA-plus.
S&P's "stable" outlook means the rating is unlikely to change in the next six months to two years, GE said.
Not out of the woods
Still, GE has plenty of issues with which it has to contend, from the credit performance of its portfolio to the value of its assets, said Alex Vallecillo, senior portfolio manager with Allegiant Asset Management. "They are not out of the woods yet," Vallecillo said. "I would have thought that they would at least downgrade it to AA. There's a good chance S&P is behind the curve."
GE Capital's operations range from financing purchases of its jet engines, to making loans to mid-sized businesses, to commercial real estate. Investors are most concerned about the parts of its portfolio that are directly exposed to consumers, including its U.S. credit-card business and British mortgages.
The concern is that defaults will rise as more unemployed consumers are unable to repay their debts and that GE will be unable to make up the difference through maneuvers like selling its commercial real estate, given the weakness of that market.
The 130-year-old company had long defended the "triple-A" as a key competitive advantage, in part because it allowed GE Capital to borrow money cheaply - and thus lend it out more profitably.
But GE officials began to change their tone after both top credit agencies put the company's ratings under view, with Chief Executive Jeff Immelt in early February acknowledging he was prepared to run the company as an AA-rated entity. A month later, Chief Financial Officer Keith Sherin allowed that a cut to the AA range was "possible."
On the other hand, Berkshire Hathaway, billionaire investor Warren Buffet's conglomerate, also lost its AAA rating and has a negative outlook from Fitch Ratings.
S&P said a sharp deterioration in world economies would lead to rising credit losses across GE's finance portfolio. However, S&P raised its outlook to stable from negative.
"We're expecting really no earnings and no cash flow for GE Capital this year or next year," said S&P analyst Robert Schulz in an interview. "Now that we're at a lower rating, we think that 'stable' was more appropriate."
S&P lowered its outlook on GE's ratings to "negative" in December. A month later, Moody's Investors Service took a stronger step, putting its ratings on review for possible downgrade. Moody's put GE on review on Jan. 28 and typically tries to complete its reviews within 90 days.
Their stance was unchanged even after the firm cut its dividend by 68 percent in a move to save $9 billion a year. "It's good to see it not drop lower, and it's heartening to see that the outlook is stable. The ratings agencies can see more of that portfolio (than the average investor)," said Daniel Holland, equity analyst at Morningstar in Chicago. "Back in December when they flipped to negative, pandemonium broke loose, so it's good to see them to go stable."
GE stock, the last original component to remain in the Dow Jones industrial average, jumped $1.08 to close at $9.57 on the New York Stock Exchange Thursday, reaching its best level since Feb. 19 and helped boost the overall stock market.
Spreads for GE's 5.625 percent notes due in 2017 - the most actively traded corporate bond on Thursday - narrowed over Treasuries. The cost of insuring debt of GE's finance arm against default fell.
Attention turned to next week's investor meeting, in which GE could revise lower its profit target for the finance unit.
"Management will provide more details on its balance sheet stress test, which will likely focus on the triggers for rising credit losses and further asset value impairments," Deutsche Bank analyst Nigel Coe wrote in a research note.
GE, in a statement released just after the downgrade to AA-plus, said it does not anticipate significant operational or funding impact, and said it is one of the only financial services companies with a rating as high as AA-plus.
S&P's "stable" outlook means the rating is unlikely to change in the next six months to two years, GE said.
Not out of the woods
Still, GE has plenty of issues with which it has to contend, from the credit performance of its portfolio to the value of its assets, said Alex Vallecillo, senior portfolio manager with Allegiant Asset Management. "They are not out of the woods yet," Vallecillo said. "I would have thought that they would at least downgrade it to AA. There's a good chance S&P is behind the curve."
GE Capital's operations range from financing purchases of its jet engines, to making loans to mid-sized businesses, to commercial real estate. Investors are most concerned about the parts of its portfolio that are directly exposed to consumers, including its U.S. credit-card business and British mortgages.
The concern is that defaults will rise as more unemployed consumers are unable to repay their debts and that GE will be unable to make up the difference through maneuvers like selling its commercial real estate, given the weakness of that market.
The 130-year-old company had long defended the "triple-A" as a key competitive advantage, in part because it allowed GE Capital to borrow money cheaply - and thus lend it out more profitably.
But GE officials began to change their tone after both top credit agencies put the company's ratings under view, with Chief Executive Jeff Immelt in early February acknowledging he was prepared to run the company as an AA-rated entity. A month later, Chief Financial Officer Keith Sherin allowed that a cut to the AA range was "possible."
On the other hand, Berkshire Hathaway, billionaire investor Warren Buffet's conglomerate, also lost its AAA rating and has a negative outlook from Fitch Ratings.