Standard & Poor's stripped General Electric Co
The main factor in the downgrade was our assessment of the stand-alone credit profile of financial services unit GE Capital Corp, S&P said in a statement. We believe that GECC is under increasing earnings pressure, due to recent sharp deterioration in general economic conditions around the globe.
This will result, in our opinion, in rising credit losses across key segments of its finance portfolio. This is also causing weakening of the value of its real estate holdings and investment securities, S&P said.
S&P lowered its outlook on GE's ratings to negative in December. A month later, Moody's Investors Service took a stronger step, putting its ratings on review for possible downgrade.
Their stance was unchanged even after the company cut its dividend by 68 percent, in a move GE said would save $9 billion a year.
It's good to see it not drop lower, and it's heartening to see that the outlook is stable. The ratings agencies can see more of that portfolio (than the average investor), said Daniel Holland, equity analyst at Morningstar in Chicago. Back in December when they flipped to negative, pandemonium broke loose, so it's good to see them to go stable.
GE stock jumped 5.5 percent to $8.95 in early trading on the New York Stock Exchange.
GE, in a statement released just seconds after the downgrade, said it is one of the only financial services companies with a rating of AA-plus, and said it does not anticipate significant operational or funding impact from the change.
We are prepared to run the company as a Double-A but will continue to run the company with the disciplines of a Triple-A company, Chief Executive Jeffrey Immelt said in a statement.
The cost of insuring debt of General Electric Co's finance arm against default fell slightly after the downgrade. Five-year credit default swaps on General Electric Capital traded around 8 percent upfront, versus 9 percent upfront before the downgrade, in addition to 500 basis points annually, according to Phoenix Partners Group.
GE spokesman Russell Wilkerson called the downgrade a good outcome under the circumstances. S&P's stable outlook means the rating is unlikely to change in the next six months to two years, GE said.
This was largely priced in and the bigger concern was if it would be a more than one notch cut, said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan.
It's good for the market that it was only one notch, but that's not to say there won't be continuing pressure on their debt.
The 130-year-old company had long defended the triple-A as a key competitive advantage, in part because it allowed GE Capital to borrow money cheaply -- and thus lend it out more profitably.
But GE officials began to change their tone after both top credit agencies put its ratings under view, with Chief Executive Jeff Immelt in early February acknowledging he was prepared to run the company as a double-A rated entity. A month later, Chief Financial Officer Keith Sherin allowed that a cut to the double-A range was possible.
GE, based in Fairfield, Connecticut, has held a top credit rating since 1956, when S&P first applied a triple-A rating to it. Moody's followed suit in 1967.
Following GE's downgrade, just four nonfinancial companies get top marks from both agencies. They are Johnson & Johnson
Shares of GE, the sole original component to remain in the Dow Jones industrial average <.DJI>, have been pounded over the past year as troubles at GE Capital have weighed on its profit.
I think the market was bracing for a possible negative outlook. That risk is off the table and that is cheering investors in GE, said David Dietze, chief investment strategist at Point View Financial Services, in Summit, New Jersey.
(Additional reporting by Nick Carey in Chicago, and John Parry, Dena Aubin and Walden Siew in New York)
(Editing by Dave Zimmerman)