GENERAL ELECTRIC debt downgraded to AA+

Escrito el 12 Marzo 2009 por Antonio Rivela Rodríguez en Uncategorized


Just a few lines to comment on GE´s recent downgrade to AA+ by S&P.

They used to have the maximum rating – i.e. AAA-. The market has digested the news with a positive tone because they can still do business with a AA+ rating. In my personal opinion they could even be fine with a AA or a AA-.

The market reacted positively not only in the US but in Europe.

See below for Bloomberg analysis.



y Rachel Layne

March 12 (Bloomberg) — General Electric Co. shares and bonds rallied after Standard & Poor’s lowered its debt ratings one level and raised the outlook to “stable,” comforting investors who feared a sharper cut as profit falls at GE’s finance arm in a global recession.

The switch to AA+, from AAA and with a “negative” outlook, affects long-termdebt, S&P analysts said in a statement today.

GE, which held the top rating since 1956, said in a statement doesn’t foresee “any significant operational or funding impacts.” The Fairfield, Connecticut-based company’s shares rose 87 cents to $9.36 at 11:55 a.m. in New York Stock Exchange composite trading.

“A one-notch downgrade and ‘stable’ mean you can take away the ratings as an issue for the time being,” said Stephen Tusa, a JPMorgan Chase & Co. analyst in New York. If S&P had kept the negative outlook, “it would have lingered as an issue.”

The downgrade is a setback for Chief Executive Officer Jeffrey Immelt, who until January was saying that GE generates enough earnings to justify keeping both its annual dividend and the AAA, an endorsement that a company is among a handful of the world’s safest and strongest. On Feb. 27 he reduced the shareholder payout for the first time since 1938 in a move to save about $9 billion a year.

Robert Schulz, the S&P analyst who oversees the GE parent company, said in an interview that the ratings committee balanced the “excellent risk profile” of GE’s industrial businesses against the prospects of weaker earnings or a “modest net loss” at GE Capital.

“We’re not expecting any real earnings or cash flow from GE Capital this year or next year,” Schulz said. Without the support of the parent company, GE Capital’s rating would be an A, lower than the previous A+ assessment, S&P said.

Market Reaction

S&P left GE and GE Capital’s commercial paper ratings at A- 1+ and said the rating for debt sold backed by the Federal Deposit Insurance Corp. remains AAA.

GE Capital’s $3 billion of 5.625 percent notes due in 2017 rose 1.4 cents to 82.9 cents on the dollar, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The notes yield 8.49 percent. The notes earlier rose as much as 2.1 cents to 83.7 cents, a two-week high.

The new rating “takes away that ambiguity,” said Peter Sorrentino, who helps manage $15 billion at Huntington Asset Advisors in Cincinnati. “The short-term rating was affirmed and the outlook is stable, so that’s a plus.”

The cost of protecting bonds sold by GE Capital fell 0.7 percentage point to 8.3 percent upfront today, according to CMA Datavision prices for credit-default swaps. The price means it would cost $830,000 in advance and $500,000 annually to protect $10 million of debt for five years.

GE Capital Transparency

The shares dropped 75 percent in 12 months through yesterday and traded below $6 on March 4, the lowest since December 1991, as some investors and analysts criticized the company for a lack of transparency at the GE Capital finance arm. Investors are concerned that the unit, already facing rising credit-card delinquencies and $4 billion in unrealized property losses, will require more capital than GE anticipates.

The company has scheduled what it calls a “deep-dive” meeting with analysts for March 19 to give more detail about GE Capital holdings.

Standard & Poor’s in December said GE had a 1-in-3 chance of losing its top AAA designation within two years, and S&P kept GE’s “negative” outlook after the dividend reduction. Moody’s Investors Service put GE on review in January and, after the dividend cut, said it would keep studying GE’s debt for a possible lower rating than its top-level Aaa.

Ratings Services

“The rating agencies are catching up to the reality within the finance operations at GE,” said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York, citing the global slowdown.

The global recession and credit crisis may lower odds GE Capital can make its $5 billion profit goal this year and that demand will hold up for GE’s goods as the world’s largest maker of jet engines, power turbines and medical-imaging equipment.

General Electric had held S&P’s AAA since 1956, the year Immelt was born. The company has had Moody’s Aaa top rating since 1967. Today’s downgrade squares with what investors already see: GE has traded for six years as though its bonds were less than the highest rating.

Immelt Strategy

Immelt, 53, said in a March 5 interview that a ratings drop won’t change the way he runs the company or alter his plan to shrink GE Capital to produce a lower percentage of the parent’s profit.

“I will run GE with reduced leverage, reduced commercial paper, and earning money in GE Capital, which have long been the elements of being a AAA,” Immelt said in the interview. “I’m going to continue to run the company, the same as I’ve always run the company which is with that kind of discipline.”

Under debt instrument guarantees and covenants, GE would have to post additional collateral if the ratings were cut below AA-/Aa3 or A-1 and P-1, or four levels, the company said in its annual filings with the U.S. Securities and Exchange Commission last month.

GE said in December it may generate as much as $16 billion in cash after capital expenses this year, mainly from the sale of industrial goods, more than enough for the annual dividend payout. GE’s non-finance businesses had $16.7 billion in free cash flow from operations in 2008, after capital expenditures.

Profit Prospects

GE Capital posted $8.6 billion of the parent company’s $18.1 billion in profit last year and predicts it will earn $5 billion this year. Chief Financial Officer Keith Sherin said Feb. 10 that projection exceeds most analysts’ forecasts.

Immelt and GE’s board last month decided to cut the quarterly dividend by 68 percent, to 10 cents a share from 31 cents. The decision will free up about $4.4 billion in this year’s second half, the company said. GE has paid a dividend in each of the past 110 years.

On Sept. 25, GE reduced its annual profit forecast for a second time and suspended its stock buyback. A week later, GE got a $3 billion investment from investorWarren Buffett’s Berkshire Hathaway Inc. and said it would sell $12 billion in common stock.




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