GE's Downgrade Sends Stock Up

S&P downgrades the credit rating of our parent, General Electric—why is it trading up?

Part of this is simply "sell the rumor, buy the news," but it's a little more complicated than that.

The key is that S&P worded the statement very carefully and emphasized, "the outlook is stable."

They noted that GE Capital is under increasing earnings pressure due to rising credit losses and that GE will not benefit from any meaningful earnings or cash flow from GE Capital through 2010.

But, they went on to heap praise on the company, noting its "excellent business profile, its significant cash flow and liquidity, its strong corporate governance, and management's commitment to maintaining very high credit quality."

There's more: GE has a "demonstrated ability for these businesses to earn solid profits and generate substantial cash, even in very tough economic conditions."

Here's the coup de grace: the company's commitment to maintaining credit quality, the still-solid prospects for many of its business segments, and the company's financial flexibility "should continue to support the ratings at the current level and the stable outlook."

GE CEO Jeff Immelt, in a letter to colleagues this morning, noted the importance of the "stable" phrase: "a "stable" outlook means the rating is unlikely to change in the next six months to two years."

GE will provide an update on GE Capital on March 19th.

Deutsche Bank, in a note to clients, said: "Overall, we believe this is good news as the market was expecting the downgrade and it removes a layer of uncertainty - there was fear, albeit low probability, that ratings could fall to AA- or lower which would trigger collateral requirements in GE Capital."

Moody's by the way, is expected to also review GE's ratings in the near future.



Questions? Comments?