General Electric Co was stripped of its AAA credit rating by Standard & Poor's, which cited the performance of GE's finance unit, but its shares rose 12.7 percent as investors breathed a sigh of relief the cut was not deeper.

S&P said a sharp deterioration in world economies would lead to rising credit losses across GE's finance portfolio.

However, S&P raised its outlook to stable from negative.

We're expecting really no earnings and no cash flow for GE Capital this year or next year, said S&P analyst Robert Schulz in an interview. Now that we're at a lower rating, we think that 'stable' was more appropriate...

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. Moody's put GE on review on January 28 and typically tries to complete its reviews within 90 days.

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, the last original component to remain in the Dow Jones industrial average <.DJI>, jumped $1.08 to close at $9.57 on the New York Stock Exchange, reaching its best level since February 19 and helped boost the overall stock market.

Spreads for GE's 5.625 percent notes due in 2017 -- the most actively traded corporate bond on Thursday -- narrowed over Treasuries. The cost of insuring debt of GE's finance arm against default fell.

NOT OUT OF THE WOODS

Attention turned to next week's investor meeting, in which GE could revise lower its profit target for the finance unit.

Management will provide more details on its balance sheet stress test, which will likely focus on the triggers for rising credit losses and further asset value impairments, Deutsche Bank analyst Nigel Coe wrote in a research note.

GE, in a statement released just after the downgrade to AA-plus, said it does not anticipate significant operational or funding impact, and said it is one of the only financial services companies with a rating as high as AA-plus.

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.

Still, GE has plenty of issues with which it has to contend, from the credit performance of its portfolio to the value of its assets, said Alex Vallecillo, senior portfolio manager with Allegiant Asset Management, which manages assets of $28 billion but does not own GE shares.

They are not out of the woods yet by any stretch, Vallecillo said. I would have thought that they would at least downgrade it to AA. There's a good chance they (S&P) are behind the curve on this.

GE Capital's operations range from financing purchases of its jet engines, to making loans to mid-sized businesses, to investing in commercial real estate. Investors are most concerned about the parts of its portfolio that are directly exposed to consumers, including its U.S. private-label, credit-card business and UK mortgages.

The concern is that defaults will rise as more unemployed consumers are unable to repay their debts and that GE will be unable to make up the difference through maneuvers like selling its commercial real estate, given the weakness of that market.

'GOOD FOR THE MARKET'

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 the company's ratings under view, with Chief Executive Jeff Immelt in early February acknowledging he was prepared to run the company as an AA-rated entity. A month later, Chief Financial Officer Keith Sherin allowed that a cut to the AA range was possible.

The Fairfield, Connecticut-based company has held a top credit rating since 1956, when S&P first applied an AAA rating to it. Moody's followed suit in 1967.

Following GE's downgrade, just four nonfinancial companies get top marks from both agencies -- Johnson & Johnson , Exxon Mobil Corp , Microsoft Corp and Automatic Data Processing Inc .

(Additional reporting by Nick Carey in Chicago, and John Parry, Dena Aubin and Walden Siew in New York)

(Editing by Dave Zimmerman, Leslie Gevirtz and Carol Bishopric)

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