GE Rated AAA in Name Only?

Tags: ge
19 Dec 11:12pm
Posted by ZacksResearch
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If anyone needed more proof that in general people and companies are becoming less creditworthy, S&P just lowered the General Electric Company (GE) outlook to negative. It said that there is a one in three chance that it would lose its AAA rating within the next two years.

The problem mostly stems from its very large GE Capital unit. GE is sometimes only half jokingly referred to as a hedge fund that also makes light bulbs and jet engines. On a stand-alone basis, S&P indicated that GE Capital would have an A+ rating.

Still, I see this as more of a commentary on the overall state of the world economy than as a slam at the overall management of GE. GE is in many ways the closest single-firm proxy for the U.S. economy I can think of, given its wide ranging interests.

The market is somewhat ahead of S&P on this, with its 30-year debt trading more than 3.5% above the 30-year T-Bond -- not exactly what one would expect from an AAA firm. Then again everything is trading at record spreads vs. Treasuries, so perhaps it is more of a comment on the Treasury market than on GE.

However, the credit default swaps are trading at 415 basis points -- also not exactly what one would expect if the market perceived GE to really be AAA, which at one point meant that default was almost inconceivable. Then again, most of the absolutely radioactive mortgage securities were originally rated as AAA.

The rating agencies have major credibility problems. The whole business model of the agencies has proven itself to be extremely prone to conflicts of interest. AAA only means safety if you are stranded on the side of the road.

Read the full analyst report on GE




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