GE Aerospace (GE)

[DewDiligence]

Here’s Friday’s WSJ on the credit upgrade, er, downgrade :- )

http://online.wsj.com/article/SB123686463295007123.html

›GE Loses Top Rating on Debt

MARCH 13, 2009, 12:05 A.M. ET
By KERRY E. GRACE and KATE HAYWOOD

General Electric Co. lost the coveted triple-A credit rating it first gained in 1956, in the latest example of the ways the painful recession is remaking the corporate landscape.

In a much-anticipated move, Standard & Poor's lowered its rating on GE's long-term debt by one notch, to AA-plus, underscoring how troubles at GE's finance arm have hurt the conglomerate. Investors responded positively that the downgrade wasn't worse and that S&P said its outlook on GE is now "stable," suggesting the credit rating won't soon be lowered again.

While the change won't greatly increase the company's funding costs at this point, the triple-A rating has long symbolized GE's might, allowing the company ready access to cheap money, while enhancing its reputation as one of the nation's stalwart blue-chip companies. GE has posted disappointing earnings and higher loan losses, and recently cut its dividend for the first time since the Depression.

Investors have battered GE's stock in recent months over concerns about GE Capital's exposure. With some of the uncertainty removed, GE shares rose $1.08, or 12.7%, to close at $9.57 in 4 p.m. trading on the New York Stock exchange Thursday.

GE's bonds, which have been trading as if they were rated lower than triple-A for months, also rallied. "The market has just breathed a huge sigh of relief," said Scott MacDonald, director of research at Aladdin Capital Holdings in Stamford, Conn. "A lot of people expected that the cut would be to double-A" [i.e. one notch lower than the actual cut].

S&P said it believed GE Capital was under increased earnings pressure because of the recession, which will prompt more credit losses across its $600 billion portfolio. But S&P's lead GE analyst, Robert Schultz, said GE's cash-generation capabilities remain strong, even in the face of economic headwinds.

S&P's new rating applied to GE and GE Capital. But the ratings company said that if GE Capital were a stand-alone unit, it would be rated single-A, down from single-A-plus. [This illustrates how much better off GE would be if it didn’t own the financial business.]

GE says it has $48 billion in cash, with 90% of 2009 long-term debt needs raised so far. But GE Capital has been relying on U.S. government guarantees for much of that debt. The company in recent days sold $8 billion in two- and three-year bonds, with the government guarantee.

"We will continue to run GE with the disciplines of a triple-A company, which means low leverage, high liquidity and strong risk disciplines," GE Chief Executive Jeffrey Immelt said in a statement. GE will offer investors an update on GE Capital next week. Perry Adams, a senior portfolio manager for Huntington Private Financial Group, said that while there is still a lot of uncertainty as to whether its reserves are adequate, GE Capital has suffered from "guilt by association," even when it hasn't participated in the kind of derivative trading that hurt other financial institutions. "I think this solidifies what GE has been saying -- that they are different than other banks and financial institutions."‹