Moody's Investors Service said it was reviewing General Electric Co's triple-A credit ratings, which could lead to a downgrade, and its shares fell as much as 5% in extended trade.
The move raises the risk that GE, which has a hefty finance business, could lose the long-term triple-A rating that has been a cornerstone of its GE Capital finance business. A rating downgrade could make it more difficult and costly for GE to borrow money.
On Monday, Standard & Poor's - which has already warned that it could cut GE's triple-A rating - said its view would not be affected by disappointing fourth quarter results, but warned it believed it would be “increasingly challenging” for GE Capital to meet its earnings targets.
The US conglomerate has been working to reduce its reliance on GE Capital, as the credit crunch has hurt that unit over the past year and weighed on its earnings.
“Moody's is concerned that deepening global economic weakness could further compromise (GE Capital's) asset quality, potentially jeopardizing its ability to meet earnings objectives while also maintaining high earnings quality,” the rating agency said.
Many on Wall Street believe the world's largest maker of jet engines and electric turbines may have to sacrifice either the triple-A rating or its $1.24 per share annual dividend as it copes with falling profit in a brutal economy.
“I'm not surprised,” said Peter Klein, senior portfolio manager, Fifth Third Asset Management, Cleveland, Ohio, which holds GE shares. “They saw everything we saw during the fourth quarter conference call. It was a little bit of smoke and mirrors with the tax rate helping earnings certainly, and maybe not a realistic view of the dividend being supported by cash flows.”
GE on Tuesday said it would work with Moody's on the rating, but that losing it would not significantly change its operations.
“Our objective is to maintain our triple-A rating, but we do not anticipate any major operational impacts should that change,” the Fairfield, Connecticut-based company said in a statement.
GE has been working to cut its exposure to the commercial paper markets used for short-term funding, which briefly froze up last fall as the credit crisis exploded. It has already raised 64% of the money it expects to raise on debt markets this year.
“As one of the last of the triple-As, and with the position that GE is in, they are able to react to business cycles with agility and pick up good opportunities and play offense when other people are playing defense. You can't really do that unless you're king of the hill, and losing the triple-A rating complicates that veneer of superiority,” said John Atkins, analyst at research firm IDEAGlobal in New York.
GE is one of just five non-financial US companies to get the top triple-A rating from S&P and Moody's. The others are Johnson & Johnson, Exxon Mobil Corp, Microsoft Corp and Automatic Data Processing Inc.
In December, S&P cut its outlook on GE to “negative,” meaning it faced a 1-in-3 chance of losing the rating over the next two years.
Some analysts said any downgrade would have a limited initial impact on GE's costs of borrowing.
Having a triple-A rating is “incredibly helpful” to get lower pricing on debt in the long run but in the past 6-12 months GE's debt hasn't been priced as if it was rated like that anyway, said Daniel Holland, an analyst at Morningstar. “So the short-run ramifications are not going to be that severe,” he said. (Reuters)