Moody's Investor Service cut General Electric Co's
That new outlook -- which means no additional cuts are likely in the next 12 to 18 months -- helped shares of the world's biggest maker of jet engines and electricity-producing turbines rise 9 percent on Monday.
The move lifted one of the big worries facing GE investors, who have already digested a 68 percent dividend reduction and the S&P downgrade 11 days ago. A deeper cut could have put GE on the hook for billions of dollars in collateral calls.
Moody's now rates GE and its GE Capital finance unit Aa2, down from the former Aaa. Its short-term rating on the company is unchanged at its top level of P-1.
GE Capital remains the company's biggest vulnerability, Moody's said, but added that it expects GE's industrial businesses, which also make railroad locomotives and medical-imaging devices, to earn enough money to keep the company on a sound financial footing.
The stable outlook is the important thing from my perspective, said Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, which owns GE shares. It's just one more step in dispelling the nuclear winter fears that were surrounding GE.
Fairfield, Connecticut-based GE's stock has been pounded down about 75 percent over the past year, losing about $300 million in market capitalization. That is a deeper drop than the Dow Jones industrial average <.DJI>'s 41 percent fall.
Much of that selling was prompted by fears about how well GE Capital can weather the current recession, which is making it harder for consumers and businesses to repay their debts.
COULD MEAN COSTLIER CREDIT
The cut could make it more expensive for GE and its GE Capital finance arm to borrow money -- a key concern as that could in turn make it less profitable for GE Capital to lend out money. The company ended 2008 with $523.76 billion in outstanding short- and long-term debt, making it one of the largest corporate issuers.
But for some time GE's corporate bonds have been trading at a much higher yield than is typical of a triple-A company.
GE's primary credit risks are centered on its position as a major financial institution through GECC, Moody's said in a statement. The rating downgrade reflects Moody's opinion that the risk profile of GECC has increased and is now reflective of credits rated in the mid-'A' category (formerly high 'A') without considering support from GE.
Company officials spent more than six hours on Thursday walking investors through the GE Capital portfolio, saying they have been far more conservative in their investments and lending than many of the biggest U.S. banks.
They noted that the unit's profit may be closer to a range of $2 billion to $2.5 billion than to the $5 billion it had forecast in December. Even under an adverse economic outlook sketched out by the Federal Reserve, GE officials expect the finance arm to have a break-even year.
While no one likes a downgrade, Moody's, like S&P, confirmed the fundamental soundness of GE Capital, said Jeff Immelt, chief executive of the world's largest maker of jet engines and electricity-producing turbines.
Immelt wants GE Capital to account for 30 percent of GE's total profit, down from roughly 50 percent in 2007, before the financial crisis.
Now it's a question of the program they have and whether the environment allows it, said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio, which owns GE shares. It's a question of whether what they've got works and are there any more surprises?
THREE-MONTH WAIT ENDS
GE's former triple-A rating, which S&P first applied to the company in 1956, had been up in the air since December, when S&P lowered its outlook on the company. S&P on March 12 cut its rating on GE to AA-plus and adopted a stable outlook.
The company can continue to issue triple-A rated debt through the U.S. government's Temporary Liquidity Guarantee Program. GE is authorized to issue up to $126 billion in bonds under that program.
It also has access to $96 billion in funding through the Federal Reserve's Commercial Paper Funding Facility.
Triple-A corporate credit ratings have gotten far less common over the past few decades.
S&P in the 1980s applied its top rating to about 32 nonfinancial U.S. companies. Only four nonfinancial companies still get top marks from both agencies. They are Johnson & Johnson
GE shares rose 87 cents to $10.41 on the New York Stock Exchange late Monday afternoon.
The cost to insure GE debt with credit-default swaps rose on the news. GE's credit default swap costs rose to around 8 percent upfront, or $800,000 to insure $10 million in debt for five years, plus $500,000 in annual payments, from 7.5 percent earlier on Monday, said a trader.
The swaps had closed at around 10 percent on Friday.
(Reporting by Scott Malone; Additional reporting by Karen Brettell in New York; Editing by Tim Dobbyn, Dave Zimmerman, Richard Chang)