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Standard & Poor's stripped General Electric of its AAA credit rating, citing the performance of its finance unit and dealing a new blow to one of the world's biggest manufacturing companies, but its shares jumped 10 percent as investors feared the cut would be deeper.
S&P said on Thursday a sharp deterioration in world economies would lead to rising credit losses across GE's finance portfolio.
"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 given our expectation for the company's performance, and that's referring to the industrial cash flow.''
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.
Shares of GE were trading above $9. Traders on the floor of the New York Stock Exchange told CNBC that S&P praised GE's businesses outside of GE Capital, citing its "excellent business profile, its significant cash flow and liquidity, its strong corporate governance, and management's commitment to maintaining very high credit quality."
GE is the parent company of CNBC and CNBC.com.
Their stance was unchanged even after the company cut its dividend by 68 percent, in a move GE said would 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.''
Not Out of the Woods
GE, in a statement released just after the downgrade, said it is one of the only financial services companies with a rating as high as AA-plus, and said it does not anticipate significant operational or funding impact from the change.
GE spokesman Russell Wilkerson called the downgrade "a good outcome under the circumstances.'' S&P's "stable'' outlook means the rating is unlikely to change in the next six months to two years, GE said.
Still, GE has plenty of issues it's going to have to deal with, from the credit performance of its portfolio to the value of its assets, said Alex Vallecillo, senior portfolio manager, Allegiant Asset Management, which manages assets of $28 billion but does not own GE shares.
GE Capital's operations range from financing purchases of its jet engines, to making loans to mid-sized businesses to investing in commercial real estate. Investors are most concerned about the parts of its portfolio that are directly exposed to consumers, including its U.S. private-label credit-card business and UK 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.
"They are not out of the woods yet by any stretch,'' Vallecillo said. "I would have thought that they would at least downgrade it to AA. There's a good chance they (S&P) are behind the curve on this.''
'Good for the Market'
"This was largely priced in and the bigger concern was if it would be a more than one notch cut,'' said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "It's good for the market that it was only one notch, but that's not to say there won't be continuing pressure on their debt.''
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 its 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.''
The Fairfield, Connecticut-based company has held a top credit rating since 1956, when S&P first applied an AAA rating to it. Moody's followed suit in 1967.
Following GE's downgrade, just four nonfinancial companies get top marks from both agencies—Johnson & Johnson [JNJ
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Shares of GE, the sole original component to remain in the Dow Jones industrial average have been pounded over the past year as troubles at GE Capital have weighed on its profit.
"I think the market was bracing for a possible negative outlook. That risk is off the table and that is cheering investors in GE,'' said David Dietze, chief investment strategist at Point View Financial Services, in Summit, New Jersey.
"Everyone knew the top credit rating was no longer deserved and the question was how much lower would it be. People have to cheer the stable outlook,'' Dietze said.
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