GE, GE Capital Ratings Outlook Cut to Negative by S&P (Update4)

By Rachel Layne
Bloomberg News
December 17, 2008

Dec. 18 (Bloomberg) -- General Electric Co., the biggest issuer of U.S. corporate bonds, has a one-in-three chance of losing its AAA credit rating in the next two years as earnings deteriorate, Standard & Poor's said.

S&P cut the outlook on the company and that of its GE Capital finance arm to negative from stable. While the AAA ratings were left intact, S&P said in a statement today that it was concerned about cash flow and funding for the finance unit as global conditions worsen. GE Capital's stand-alone rating, without parent support, would be A+, four levels below, it said.

GE Chief Executive Officer Jeffrey Immelt said Dec. 16 that the company's industrial businesses, which include NBC-Universal, will rise no more than 5 percent next year. That's less than a range of 10 percent to 15 percent given in September. Profit at GE Capital will decline to $5 billion in 2009 from about $9 billion excluding restructuring expenses, he repeated.

"The priority concern from our perspective are the earnings prospects of" GE Capital Corp., S&P analyst Scott Sprinzen, who follows the finance arm, said in an interview. "And we know that they operate in a cyclical business, and that we're in the midst of a cyclical decline. To some extent, that's factored into the ratings. It seems that this is unfolding as an extraordinarily severe downturn."

GE Capital would have to fall "well short" of the $5 billion in net income forecast for next year for S&P to reconsider the rating, Sprinzen said in the interview.

GE declined $1.43, or 8.2 percent, to $15.96 at 4:15 p.m. in New York Stock Exchange composite trading. Credit-default swaps on GE Capital rose 20 basis points to 415 basis points after reaching a one-month low of 395 earlier today, according to broker Phoenix Partners Group.

Known Risk

"The institutional investors that really make the market for GE's debt, they already know the level of risk, regardless of what you call it, AAA or AA+," said Guy Lebas, chief economist at Janney Montgomery Scott LLC in Philadelphia. "They're trading with yields that are not reflective of a AAA credit rating. That's largely because the company has exposure to the financial world."

S&P also lowered its outlook on AAA-rated Toyota Motor Corp. on Dec. 17 and Pfizer Inc. in May 2007 on, according to data compiled by Bloomberg. S&P's outlook on GE is reflective of the broader economic environment, Robert Schultz, the S&P analyst who covers General Electric as a whole, in an interview.

"In the kind of world we're looking at for 2009 and 2010, even the very strong companies aren't immune from challenges," Schultz said.

GE's 5.875 percent bonds due in 2038, its most actively traded securities, rose .105 cents to 96.424 cents on the dollar at 3:40 p.m. in New York, according to Trace, the bond price- reporting system of the Financial Industry Regulatory Authority.

Immelt's Plan

GE Capital's "earnings deterioration in 2009 and 2010 could be greater than we previously assumed," S&P said in today's statement. "The outlook revision reflects the continuing risks posed by GECC's reliance on confidence-sensitive wholesale funding, despite the benefits of temporary U.S. government support programs and of management's ongoing efforts."

Immelt outlined a plan to use capital to support the AAA rating, the highest available, and the $1.24 a share annual dividend, which the company has committed to paying in 2009, the same level as in 2008.

"If we successfully execute on our plan, S&P will reconsider its outlook," Russell Wilkerson, spokesman for Fairfield, Connecticut-based GE, said in an interview. "We're confident in our plan as laid out on Tuesday and we'll execute in 2009."

Leverage Ratio

Immelt is shrinking GE Capital to less than 40 percent of the parent company's profit next year from about half in 2007. On Dec. 2, the company said it planned to issue about $45 billion in long-term debt next year, less than the $66 billion it has maturing, and reduce commercial paper to $50 billion in 2009, less than the $75 billion it said previously. GE is reducing its leverage ratio to 6 to 1.

The company, which was approved to sell Federal Deposit Insurance Corp.-backed bonds up to $132 billion under that program, has issued about $12.5 billion so far this year to "prefund" the $45 billion it plans to refinance next year. The parent company added $5 billion in funds to GE Capital to help meet the new leverage ratio, Immelt told investors on Dec. 16.

"If we need to do more in that context as time goes on, we'll do more," Immelt told investors. "Because I think the AAA's important."

Dividend Cost

GE said in September it would keep its $1.24 annual dividend the same for 2009, the first time in at least 32 years with no increase. The dividend costs GE about $13 billion a year based on the number of shares outstanding on Oct. 2. That payout will be covered by cash generated from operations and dispositions this year of about $18 billion, according to a chart from the CEO's presentation.

In 2009, a $13.4 billion dividend payout should be covered by cash generation, the GE Capital payment to the parent company and dispositions totaling about $16 billion, the chart said.

S&P's announcement " further sharpens the dividend debate in our view," Morgan Stanley analyst Scott Davis, who has an "overweight/cautious" rating on the stock, wrote in a note to investors today.


The S&P outlook change is "another piece of evidence that the economic outlook is extremely negative," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's Private Wealth Management unit in New York.

"They're an extremely diversified company," he said. "Their financial aspects have always been hard for investors to fully get their arms around. They're so big, involved in so many things, their financial exposure does make them vulnerable to a downgrade in this environment."

Moody's Investors Service Dec. 2 affirmed its AAA rating and "stable" outlook designation for both the parent company and finance unit. Today, it repeated that assertion for GE Capital.

In its Dec. 2 note, Moody's said it expects GE Capital to earn at least $5 billion in each of the next several years; that GE Capital can restore its historic payment level to the parent company in 2010; and that the non-finance units will generate cash flow that exceeds $16 billion in 2010.

Copyright © 2008 FBIC (

Click here to return to FBIC homepage