- The Washington Times - Thursday, March 12, 2009

WASHINGTON (AP) - General Electric Co. lost its top credit rating from Standard & Poor’s on Thursday over concerns of rising loan losses and lower earnings at its lending arm, GE Capital.

The long-expected ratings cut _ down one notch to ‘AA+’ from ‘AAA’ _ is further proof that the financial crisis has shaken the foundation of one of the nation’s biggest and traditionally most stable companies. In the past year, GE has posted disappointing earnings, seen loan losses grow, and cut its dividend for the first time since the Great Depression. The loss of its pristine credit rating means GE will likely pay more to borrow money.

To be sure, investors were relieved the ratings cut wasn’t worse. Shares of GE jumped $1.21, or 14.3 percent, to $9.71 in afternoon trading. That made them the biggest percentage gainer among companies on the Dow Jones Industrial Average.

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Investors were also heartened by S&P;’s decision to raise GE’s outlook to “stable” from “negative,” making a further credit reduction unlikely in the next six to 12 months. Analysts said a ratings downgrade was already factored into GE’s share price, which before Thursday had lost about half its value.

“This is good news as the market was expecting the downgrade and it removes a layer of uncertainty,” said Deutsche Bank analyst Nigel Coe. He added that some GE watchers feared a rating as low as “AA-.”

On Thursday, S&P; said GE Capital faces higher losses on its loans in areas such as real estate. If it stood on its own, the ratings agency would give GE Capital a much lower ‘A’ rating.

“(GE Capital) is under increasing earnings pressure,” wrote S&P; analyst Robert Schulz.

S&P; had dropped its GE outlook in December, largely because of concerns over GE Capital. Moody’s Investors Service is also reviewing its top ‘Aaa’ rating of GE.

GE was one of just six nonfinancial companies to hold the “AAA” rating, which S&P; first gave the conglomerate in 1956.

While GE previously said defending its credit rating was a priority, CEO Jeff Immelt indicated recently was prepared to fund the company at a lower level.

“I don’t believe GE is surprised to see this,” said Dilip Sarangan, an analyst with Frost & Sullivan.

Fairfield, Conn-based GE also has huge industrial businesses that make jet engines, light bulbs and wind turbines. But most of its problems stem from GE Capital, whose operations include credit cards, overseas mortgages and financing for commercial projects like power plants.

GE Capital once accounted for about half of GE’s earnings, but GE now plans to shrink it to about 30 percent of the company’s overall profit. GE says it expects GE Capital to turn a profit this year, but has set aside $10 billion for losses and is fending off speculation that greater losses are looming in commercial finance and real estate.

CEO Jeff Immelt said in an investor letter recently that he wished GE had less exposure to both areas. GE is expected to provide an update on GE Capital next week.

GE is also watching its cash closely. It cut its quarterly dividend 68 percent to 10 cents per share, a move that will free up $9 billion a year. GE has raised $48 billion in cash this year, most of its long-term debt needs for 2009. It has taken part in a federal plan that allows companies to borrow with the backing of the government’s top credit rating.

The company said the downgrade will not have a significant impact on its funding or operations.

“We will continue to run GE with the disciplines of a Triple-A company,” Immelt said in a statement Thursday.

John Atkins, a fixed-income analyst at IDEAGlobal.com, said it remained unclear what the impact will be on GE’s borrowing costs. Even with the ‘AAA’ credit rating, the cost of insuring debt of GE Capital had been in distressed territory recently.


AP Manufacturing Writer Michael Obel contributed to this report.

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