Stop Trading!: GE Credit Concerns Sink Stocks

Standard & Poor’s announced a negative outlook on General Electric’s credit rating Thursday afternoon, sending that stock and the market lower.

Standard & Poor’s Managing Director Scott Sprinzen explained during a “Street Signs” interview just what a negative outlook means to S&P, that a GE credit-rating downgrade has a one-in-three chance of happening over the next three years.

The S&P’s negative outlook for GE is not the same thing as being put on a credit watch.

Sprinzen’s report reaffirmed GE’s present rating, but pointed to earnings pressure and the need for funding at GE Capital that forced management to revise its earnings guidance. S&P generated its own projections, Sprinzen said, and “it’s clear that this is going to be a pretty severe credit cycle.”

The key for GE is for the company to make its expected $5 billion in net income for 2009. That’s not to say that a downgrade is automatic should GE miss, the S&P managing director said, “but we would have to reassess things at that point.”

“And we see at least some possibility that that will happen,” Sprinzen said of GE missing its income targets.

But if GE does manage to earn that $5 billion, show the company is on pace for a good earnings recovery, as well as maintain its targets for reducing commercial paper and a more conservative capitalization, Sprinzen said, “chances are that at that point we could move back to a stable outlook.”

Cramer wanted to know why S&P released its report after GE’s capital-raising efforts rather than before. Sprinzen pointed out that S&P is in the process of reviewing any number of financial institutions, assessing their reliance on wholesale funding, the depth of this credit cycle and other factors, the former two being key drivers behind the GE report.

So this announcement could have happened at any point in the past year and a half, Sprinzen said. “There was nothing magical about today.”

Jim's charitable trust owns General Electric.

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