S&P lowers General Electric outlook to negative
— -- Debt-rating agency Standard & Poor's on Thursday reduced its outlook on GE's debt from stable to negative, meaning there's a 1-in-3 chance it could lose its AAA rating within two years. GE's AAA rating has broad significance, because the company is just one of six non-financial U.S. companies to carry this top rating from S&P.
S&P's action threatens GE's stellar credit rating, which has been a long-standing point of pride for the company and something management points to as evidence of its fiscal prudence.
Just the possibility of GE losing its top rating unnerved investors, contributing to a 219-point drop in the Dow Jones industrials to 8605. Nervous investors continued to pour into government securities, knocking the yield on the 10-year Treasury note down to 2.07%, the lowest in a half century.
GE's AAA rating goes back half a century. GE has had it since April 26, 1956, longer than any continuously operating company in history, says Diane Vazza of S&P. The only other non-financial companies that have it now are ExxonMobil, Automatic Data Processing, Pfizer, Microsoft and Johnson & Johnson.
S&P's cautiousness stems from the GE Capital unit, which provides financing to businesses and consumers, Vazza says. GE Capital is involved in all sorts of lending, including areas under stress such as auto loans, mortgages, retail and credit cards.
The AAA rating is more of an issue of pride than economics. The borrowing cost for a company with an AAA rating is nearly identical to one with an AA rating, Vazza says, about 4.23 percentage points over U.S. debt securities with similar maturities.
Still, GE plans to protect its AAA rating by executing a plan it outlined this week to reach financial goals in 2009, spokesman Russell Wilkerson says. If the goals are met, S&P will reconsider its lowered outlook, he says. "We're proud of it (AAA rating)," he says. "We will work hard to maintain it."
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