GE and the triple-A -- investors fret

BOSTON, Nov 10 - As General Electric Co picks its way through the rubble of the worst financial crisis in decades, investors are wondering if the U.S. conglomerate's triple-A rating could be vulnerable.

Losing that top-shelf rating would cost GE, a company long regarded as the bluest of blue-chip stocks, more than just bragging rights. It would drive up borrowing costs for its hefty finance arm at a time when the unit can ill afford more bad news.

GE is adamant that keeping its triple-A is a top priority, and Standard & Poor's and Moody's Investors Service reiterated their ratings on GE following its September sale of preferred stock to Warren Buffett's Berkshire Hathaway Inc.

But that has not stopped Wall Street from worrying.

"There is a certain vulnerability to it," said Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors, which owns GE shares.

That is because GE Capital -- the sprawling finance arm with businesses ranging from investing in commercial real estate, to financing inventory at appliance retailers, to offering store credit cards -- is facing the risk of rising delinquencies due to a slowing economy.

"You could end up with the perfect storm where not only is the default rate rising but ... if they do lose the triple-A rating, then the funding cost is going to go up," Sorrentino explained.

That would squeeze margins at the troubled GE unit whose troubles brought on the stunning first-quarter earnings drop and were behind the company's subsequent cuts to its profit targets.

'KEY PRIORITY'

Executives at the Fairfield, Connecticut-based company have been adamant that they regard the triple-A rating as critical, both because of the access to cheaper credit it allows and as an indicator of fiscal discipline.

"The AAA is a key priority for GE," Chairman and Chief Executive Jeff Immelt told investors in September. "It helps us have access to the capital markets. It lowers our borrowing costs. It's a validation for both equity and debt investors."

GE's recent steps intended to protect its credit rating included the September sale of $15 billion in new shares -- including $3 billion to Buffett -- and its scaling back of its exposure to the commercial-paper market.

At a time when the company's shares have been hard hit -- they have lost about half their value this year, a sharper slide than either the Dow Jones industrial average .DJI> or Standard & Poor's 500 index .SPX> -- the triple-A is a signal to some investors that the company remains on sound footing.

"In unsettled times like we have now, maybe that's the touchstone they want to maintain confidence," said Peter Klein, senior portfolio manager at Fifth Third Asset Management, in Cleveland, which holds GE shares.

S&P and Moody's have reiterated their confidence in GE's credit-worthiness.

"There is sufficient leeway in GECC's rating to sustain a period of cyclically weak profitability," S&P said on Sept. 25 after reaffirming its "AAA" rating on GE, seen as an economic bellwether due to the size and scope of its operations.

Derivatives traders have appeared to be less than confident in GE's ratings in recent weeks.

Recently, traders were paying about $432,000 to insure $10 million of GE debt over a five-year period with credit-default swaps. That price is in line with that of companies rated "Ba1," the highest junk rating, which is 10 notches below GE's actual rating, according to Moody's Credit Strategies.

SMALL CLUB

GE is one of a handful of nonfinancial U.S. companies to get top marks from both S&P and Moody's. The others are Johnson & Johnson, Exxon Mobil Corp, Microsoft Corp and Automatic Data Processing Inc.

The ranks of triple-A companies have shrunk dramatically from the early 1980s, when S&P applied its top rating to about 32 nonfinancial U.S. companies.

The change reflects a shift in business culture, as corporate America has relied more heavily on leverage to drive the profit growth that shareholders crave.

"Companies overall feel that they need to have financial strategies that give them more flexibility. And trading that off for a triple-A is just not worth it," said Nick Riccio, a managing director at Standard & Poor's.

Noting that the cost of credit has been only modestly lower for triple-A borrowers than it has been for double-A-rated borrowers in recent years, he added, "A triple-A was more a symbolic thing than anything for corporations."

When United Parcel Service Inc's rating was cut a notch from triple-A early this year, CEO Scott Davis said the change was the result of a strategic shift by the world's top package-delivery company to take on more debt to fund growth.

"You don't get rewarded enough for being an 'AAA' company," Davis said in March.

While investors said GE needs to defend its triple-A in the near term, as losing it would be another blow to already-shaken confidence, some wondered if it will continue to make sense for the company over the long term, particularly as it looks to scale back its finance operations.

"The stock had a premium multiple and lately that's disappeared," said Fifth Third's Klein. "It becomes a question of what is it worth to have that? If they're not going to get the multiple again from investors, is the stock market telling them they're a solid double-A? Then why try to reach for a triple-A rating?"