GE loses top rating in downgrade

NEW YORK (CNNMoney.com) -- Conglomerate General Electric Co. lost its perfect credit rating Thursday when rating agency Standard & Poor's downgraded the company.

S&P said it lowered the company's rating to "AA+" from "AAA," because it expects the worsening economy to cause GE's holdings to deteriorate in value. GE's finance arm GE Capital Corp. (GECC) also received a one-notch downgrade to AA+.

"We believe that GECC is under increasing earnings pressure, due to the recent sharp deterioration in general economic conditions around the globe," said Standard & Poor's credit analyst Robert Schulz. "This will result, in our opinion, in rising credit losses across key segments of finance portfolio."

The rating agency said that it still believes that GE is on solid footing, predicting that the multinational company will be able to generate about $2 billion in cash flow due to its huge reduction of its dividend to 10 cents from 31 cents late last month.

"We expect GE's commitment to maintaining very high credit quality, the still-solid prospects for many of its business segments (despite economic weakness), and the company's ample financial flexibility should continue to support the ratings at the current level and the stable outlook," added Schulz.

GE was one of only six American companies to hold AAA status. The five remaining are Berkshire Hathaway Inc. (BRK.A), Automatic Data Processing (ADP, Fortune 500), Exxon Mobil Corp. (XOM, Fortune 500), Johnson & Johnson (JNJ, Fortune 500) and Microsoft Corp (MSFT, Fortune 500).

An AAA credit rating allows a company to borrow at cheaper rates, but it also requires a significant amount of cash on hand, which GE was unable to maintain with its escalating debt.

GE said it will not change its business practices despite the downgrade, noting that it has taken steps to ensure that its balance sheet and liquidity position were bolstered.

"As we have previously said, we are prepared to fund the company as a double-A, but we will continue to run GE with the disciplines of a triple-A company, which means low leverage, high liquidity and strong risk disciplines," said Jeff Immelt, GE chief executive. "While no one likes a downgrade, this review and rating reaffirm the relative strength of the company."

Jon Larsen, portfolio manager of Albion Management Group, said GE's downgrade was expected.

"It's not that much of surprise, because of their debt situation and the amount of fear that's out there," said Larsen, who runs a mutual fund with GE as its top holding. "In the current environment, with that amount of debt, it's probably been due for a while."

Shares of GE (GE, Fortune 500) soared more than 11% in early trading. Bergenson said investors felt relief after worrying GE would be downgraded by several notches instead of just one.

To maintain the rare AAA rating, experts say GE had to exert extra caution, costing the company billions of dollars in security measures.

"AAA has a sort-of saintly symbolism, -- usually only governments have AAA ratings," said Sylvain Raynes, principal of R&R Consulting, a company that helps clients value its securities. "A company that wants to be AAA is giving up on things that are important to most companies, like leverage and experimenting with new systems that could be fly-by-night."

Ann Rutledge, also of R&R Consulting, called the downgrade "a defining moment for GE," expecting more downgrades from other agencies to come, followed by GE's credit rating slipping even further in the future.

"No one is going to panic here," said Rutledge. "GE will have to pay a little more for capital, and the transcendental feeling of comfort and security is gone, but the impact is more qualitative and quantitative."

Still, when insurer American International Group (AIG, Fortune 500) lost its AAA rating in 2005, the company started on a downward spiral that forced it to raise more and more capital. Bond insurer Ambac Financial Group (ABK) lost its AAA rating in January of 2008, and its stock is currently trading at less than $1 a share.

"No one believed in AIG or Ambac, because they were houses of cards," said Raynes. "But GE is so far away from not paying its bills, it's ridiculous. GE already began taking measures since it was put on credit-watch negative."

Larsen thinks that GE needs to focus on finding a way to spin off its ailing GE Capital wing before it attempts to reclaim its AAA rating.

"The unfortunate situation GE is in is they bet too big on the AAA rating," he said. "I'm hoping that they just deal with what they need to within the company and forget about the AAA for the short-term. But it wouldn't surprise me if they break their back to get the AAA back."