The cost to protect debt from General Electric Co.’s finance unit against a default rose to the most in almost a month after Moody’s Investors Service cut its credit rating by two steps.
Credit default swaps on GE Capital Corp. climbed 10 basis points to 147 basis points, the biggest increase since March 6, as of 9:10 a.m. in New York, according to data provider CMA. “Heightened risk” from the finance unit prompted Moody’s to cut GE Capital’s rating to A1 and reduce the parent company’s grade one level to Aa3, the ratings company said yesterday.
The cuts conclude a review begun March 19 after Moody’s revised the criteria for ratings of financial companies including GE Capital. They don’t reflect the unit’s diminished importance to Fairfield, Connecticut-based GE since profits evaporated during the financial crisis, said Joel Levington, head of corporate credit at Brookfield Asset Management Inc.
“This is nothing more than Moody’s taking a very delayed action,” Levington, who’s based in New York, said in an e-mail. “This is a late reassessment of a sector that obviously has risk.”
Moody’s said the downgrades reflect “the impact of GE Capital’s higher risk profile on GE,” in part from a GE Capital funding model reliant on access to debt markets. Without GE’s support, the finance arm would be rated Baa1, three levels lower, Moody’s said.
Borrowing Costs Unaffected
They cuts are unlikely to affect the company’s borrowing costs or delay the Federal Reserve in approving the resumption of payouts from GE Capital to its parent, Julian Mitchell, an analyst at Credit Suisse Group AG in New York, wrote in a note to clients.
“We continue to think that GE Capital will resume its dividend, which will allow for some increased capital returns to shareholders, as well as a more aggressive M&A program” in the second half of this year, Mitchell wrote.
A GE spokesman, Andrew Williams, said Moody’s actions reflect a change in the ratings company’s methodology, not GE’s credit position, “which has only improved in the past few years.”
GE Capital’s $1.43 billion of 2.9 percent notes due in January 2017 traded fell 0.3 cent to 103.75 cents on the dollar at 8:03 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield climbed to 2.07 percent.
Credit Default Swaps
Five-year credit default swaps on GE Capital have climbed 21 basis points since falling on March 19 to 126 basis points, the lowest in more than eight months, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Moody’s and Standard & Poor’s have assigned GE and its finance unit equal credit ratings since at least 1990, according to GE and data compiled by Bloomberg.
GE shares fell 1.5 percent to $19.67 at 10:10 a.m. in New York.
‘Healthy Balance Sheet’
“With over $80 billion in cash and a healthy balance sheet, GE is well positioned and GE Capital remains one of the highest-rated financial services companies in the world,” Williams said in an e-mail.
The Moody’s review took place after GE began working to diversify funding at the finance unit by reducing borrowing in unsecured debt markets and seeking alternative sources of capital such as deposits.
GE has been bolstering its industrial divisions with acquisitions focused on energy while shrinking its financial unit after global credit markets froze following the September 2008 bankruptcy of Lehman Brothers Holdings Inc. GE lost its top credit ratings of Aaa from Moody’s and AAA from Standard & Poor’s in March 2009.
“We believe that GE’s industrial operations continue to have many Aaa-like credit characteristics,” Russell Solomon, Moody’s lead analyst for GE, said in the statement. “The downgrade reflects Moody’s view of the heightened risk profile inherent to finance companies like GE Capital, which has strategic importance to GE, rather than any deemed incremental risk related to GE’s industrial business lines.”
GE Capital generated 31 percent of the parent compay’s $147.3 billion in sales in 2011, according to a regulatory filing. The division’s profit of $6.55 billion was 46 percent of GE’s earnings.
© Copyright 2014 Bloomberg News. All rights reserved.