Thursday, March 5, 2009

Investors fear GE will lose triple A rating

By Justin Baer and Nicole Bullock (Financial Times):

General Electric’s shares tumbled briefly to below $6 on Wednesday, a level unseen since 1991, amid continued investor fears that the conglomerate could lose its triple A credit rating and make another equity issue.

The two scenarios have haunted GE’s shares in recent weeks, even as the company took steps to shore up its beleaguered finance arm, GE Capital, by diverting $9.5bn in cash from the corporate parent this quarter and slashing its dividend.

The stock fell for the 11th time in the past 14 sessions and has lost almost 60 per cent of its value this year, prompting GE to write to investors on Wednesday seeking to assuage fears for GE Capital’s stability.

GE, which raised $15bn in an equity issue last year, has said repeatedly that it has no plans to sell more shares. GE reaffirmed on Wednesday it was in a strong capital position with ample liquidity.

GE Capital has $36bn in cash, GE wrote on Wednesday in the note to investors. Cutting its quarterly dividend from 31 to 10 cents, from the second half of 2009 would save GE $9bn annually.

“Recently, claims have been made that GE will be required to raise new capital near-term,” the company wrote. “This is pure speculation, is inaccurate and is not based on any input from our company. Currently, we have no plans to raise additional equity. In the unexpected event that GE Capital requires additional equity, we have a number of options to satisfy that need without seeking external capital.”

Steven Winoker, an analyst with Sanford C. Bernstein, said these options could include eliminating its remaining dividend pay-outs and curtailing new loans by GE Capital. Even if it were to lose its top debt ratings from Standard’s & Poor’s and Moody’s, GE has said this would not affect its operations. Both firms are reviewing GE’s ratings.

GE’s shares closed 4.5 per cent lower at $6.69 on Wednesday. The cost to insure $10m in GE Capital debt against default for five years rose to another record high on Wednesday to 20 points up front, meaning a fee of $2m plus $500,000, before easing to 15 points, according to CMA Datavision.

Separately, Moody’s said it might downgrade the credit rating of JPMorgan Chase, Bank of America and Wells Fargo amid fears over the banks’ mounting losses on their consumer loans and their capital strength.

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