On Thursday, Standard & Poor's downgraded General Electric's (NYSE:GE) long-term debt rating by a single notch, from AAA to AA+, with a "stable" outlook. That leaves just five nonfinancial companies with the highest rating, including stalwarts Pfizer (NYSE:PFE), Microsoft (NASDAQ:MSFT), and ExxonMobil (NYSE:XOM). Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) also retains the coveted AAA mark.
Although GE has held the top rating since 1956, the downgrade is mostly (but not entirely) a nonevent.
Credit rating agencies asleep at the switch
For one, the action says more about the glacial pace at which the credit rating agencies react to economic reality (as with the MBS/ CDO fiasco) than it does about GE's creditworthiness. In fact, Moody's (NYSE:MCO) continues to award GE its highest rating, but I expect it won't be long before it falls in line. The downgrade was widely expected: GE bonds have been trading at yields consistent with a rating below AAA for the past six years. Its implied bond rating is five notches lower, at A2, according to ... Moody's.
GE Capital's $3 billion of 5.625% notes due in 2017 rose to a two-week high during today's session (i.e. investors require a lower yield).
In a response to the ratings cut, the company said that it "does not anticipate any significant operational or funding impacts." For once, that doesn't smell like PR-speak; as we've seen, the company's long-term funding cost hasn't been tied to its AAA rating for quite some time. As far as short-term funding is concerned, GE and GE Capital's commercial paper funding rating from S&P remains unchanged at A-1+.
This downgrade actually helps GE
Far from harming the company, the downgrade actually benefits it by removing an element of uncertainty that was weighing on shares and commanding enormous (perhaps unwarranted) attention. GE management will no longer need to address this issue and investors can refocus on the fundamentals of the business. That process looks like it's already begun; GE shares have gained over 13% on the day.
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