Thursday, 12 March 2009

The Most Prominent Fallen Angel in Years: General Electric Loses AAA Ratings at S&P; Now Rated AA+, Outlook Stable

We are almost done -- no triple-As during this crisis ...

Standard and Poor's today lowered its long-term ratings on General Electric Co. and units, including General Electric Capital Corp., by one notch to AA+ from AAA. This is the most prominent fallen angel we have had in the markets in years. These guys had that top credit rating since 1956! I mean, this crisis is not peanuts -- institutions such as GE are losing credibility before creditors. This is a huge (although expected) event ...

The main factor behind the GE downgrade was S&P's assessment of the stand-alone credit profile of financial services unit GECC, -- which has been under attack for, surprise, surprise, a lack of transparency. Investors fretted about GECC in recent weeks, saying it might be facing swelling losses stemming from failed real estate investments and a growing deterioration of its credit card business (delinquency rates are climbing.) S&P views CECC credit quality at a level comparable to an A rated company, compared to the A+ it indicated before. "We believe that GECC is under increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe,´´ said S&P analyst Robert Schulz. "This will result, in our opinion, in rising credit losses across key segments of GECC's finance portfolio. Still, we believe that GE's industrial-based cash generation capabilities remain fundamentally strong -- even in the face of enormous global economic headwinds -- and that it will generate growing cash balances from current levels over the next two years.´´

To be sure, -- I am happy to see that rating companies' reports are finally including these, -- S&P may reexamine the (stable) outlook if, ''for example, we came to believe that GE would fail to generate discretionary free cash flow (after dividends) of around $2 billion in 2009 and significantly more in 2010 and retain a very substantial portion of this cash -– we would view a portion of this cash as available to support GECC.´´ Ha! In light of the recent sharp reduction in the dividend, such step would require net earnings below $9 billion in 2009, which the ratings company says could occur if revenues fell more than 5 percent (a very possible event,) if industrial gross margins fell 100 basis points or more (which might be possible too,) and GE had little success in managing working capital in 2009 (and we are sure investors won't let GECC get away with things.) So ... another downgrade may be on the works if these GE guys, especially CEO Jeff Immelt, doesn't get his act together now.

Says Reuters: ''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.´´ The downgrade leaves just a few U.S. companies at the top of credit ratings rankings -- Berkshire Hathaway of Warren Buffett; Microsoft of the world's richest man, Bill Gates; Exxon Mobil, the oil giant ... I remember at the start of last year there were nine!

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