GE loses prized debt rating as recession exposes risks
March 13, 2009
By Rachel Layne
General Electric has lost its Aaa rating from Moody's Investors Service for the first time in four decades as a global recession saps earnings and exposes potential risks.
The downgrade to AA+ with a stable outlook affected long-term debt that was not insured by the Federal Deposit Insurance Corporation, Moody's analysts said on Thursday.
The loss of the Aaa rating - a sign that a company is among a handful of the world's safest and strongest - is a setback for chief executive Jeffrey Immelt, who said as recently as January that GE had generated enough earnings to justify keeping the rating and its annual dividend.
A month later he reduced the shareholder payout for the first time since 1938 in a move to save about $9 billion (R92.5 billion) a year.
Moody's put GE on review in January 2009 and, after the dividend cut, said it would keep studying GE's debt for a possible lower rating.
In December Standard & Poor's (S&P) said GE had a one in three chance of losing its top AAA designation within two years. It kept GE's negative outlook after the dividend cut.
The company has come under attack for a lack of transparency at its finance arm, GE Capital. Investors worry that the unit, which faces rising credit card delinquencies and $4 billion in unrealised property losses, will require more capital than GE anticipates.
GE's shares fell 4c to $8.45 by 8.51am in New York on Thursday. They have dropped 75 percent in 12 months and hit their lowest level since December 1991 when they traded below $6 last Wednesday, while credit default swaps that investors buy as protection against possible default surged.
The global recession and credit crisis may lower odds that GE Capital can make its $5 billion profit goal in 2009 and that demand will hold up for goods of the world's largest maker of jet engines, power turbines and medical-imaging equipment.
GE has held Moody's top rating since 1967. It has held S&P's equivalent since 1956.
The downgrade squares with what investors already see: for six years GE has traded as though its bonds were below Aaa, Moody's implied ratings show. The trading suggests the company should be ranked at A2, five steps lower than Aaa.
GE Capital's $4.5 billion of notes due in 2012 rose 0.8c to 92.3c on Wednesday. The debt yields 8.77 percent, or 6.74 percentage points more than similar maturity treasuries.
Under debt guarantees and covenants, GE would have to post additional collateral if its rating was cut below Aa3, or four levels, it said in annual US Securities and Exchange Commission filings in February.
Immelt said last week that a ratings drop would not change the way he ran the company or alter his plan to shrink GE Capital to produce less 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.
"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."
In December 2008 Moody's laid out criteria GE had to meet to retain the top rating. These included the ability to produce a combined $16 billion in annual cash flow at non-finance units.
GE said in December it might generate as much as $16 billion in cash after capital expenses in 2009, mainly from the sale of industrial goods, more than enough for the annual dividend payout. GE's non-finance businesses had $16.7&nbwsp;billion in free cash flow from operations in 2008, after capital expenditures.
GE Capital posted $8.6 billion of the group's $18.1 billion in profit in 2008 and predicts it will earn $5 billion in 2009.
GE's board last month decided to cut the quarterly dividend by 68 percent to 10c a share, saying the decision would free up about $4.4 billion in the second half.
GE suspended its stock buyback in September 2008. A week later it got a $3 billion investment from Berkshire Hathaway and said it would sell $12 billion in common stock.
Only five US borrowers - Automatic Data Processing, Berkshire Hathaway, Exxon Mobil, Microsoft and TIAA-CREF - now hold the highest Moody's rating, the lowest number since inception in 1909. - Bloomberg
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