por Lynn Shapiro
, Writer | March 23, 2009
Moody's Investors Services cut GE and its finance unit, GE Capital, by two notches from Aaa to Aa2 on Monday following a similar move by S&P on March 12. The downgrade makes it more expensive to insure GE's debt.
As a result, GE's credit default swaps (meant to protect investors against debt) climbed to about 8 percent upfront, or $800,000 to insure $10 million of debt for five years, plus $500,000 in annual payments, up from 7.5 percent before the cut was announced, according to an investor.
The two-level downgrade to Aa2 with a "stable" outlook, affects long-term debt that isn't insured by the Federal Deposit Insurance Corporation, Moody's analysts said in a statement. Moody's also affirmed GE's top commercial paper rating.
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The downgrade reflects Moody's concern that GE might need more capital to finance the company, given the credit crunch. However, chief financial officer, Keith Sherin, said on March 19 at a meeting with shareholders in New York City, that GE Capital will not need additional funding and at worst would break even, under measures the Federal Reserve is using to test banks.
GE told investors at the meeting that its financial unit was "stress-tested" by the Fed, including a worst-case scenario in which U.S. unemployment reached 10 percent and gross domestic product fell by more than 3 percent this year.
"Even in the worst case [according to the Fed] we're break-even to slightly profitable and we have no need for outside capital," GE Capital's chief executive, Michael Neal, told investors.
Hounded by Investors
GE shares have plunged 75 percent in the last 12 months as analysts hounded the company for not keeping investors aware of its deteriorating condition. Investors are concerned that GE Capital, already encountering credit-card defaults and $4 billion in property losses, will need more capital than GE is letting on.
Trying to comfort investors, the company last week hosted a "deep-dive" -- a meeting to provide more information about GE Capital's holdings. Its financial businesses include: commercial real estate, private-label credit cards, lending to midsized companies, and leasing for large equipment such as aircraft, GE said.
We're running GE Capital to be safe and secure in this environment," Sherin told shareholders. "We have enough capital to be able to weather a very adverse set of cases."
GE rose 39 cents, or 4.1 percent, to $9.93 in afternoon New York Stock Exchange trading after the downgraded was announced.