GE’s triple-A credit rating is so important, especially now that it has been threatened by S&P, that it has overshadowed the company’s earnings this morning. But really it’s high time that GE lost the rating, which is a throwback to the pre-crisis era. Why?
- The slogan is familiar by now: any company reliant on its triple-A rating shouldn’t have one. GE should by rights be a large industrial company, but over the years, thanks to that rating, GE Capital — essentially an in-house SIV — became a monster which grew to a point where it drives the company’s earnings and success. It became so big, in fact, that it needed its very own Fed bailout. This is not healthy.
- Triple-A means risk-free, and GE isn’t that, as one look at its spreads will indicate: five-year GE bonds are trading at 326bp over Treasuries, which, as Eric Falkenstein says, is "a spread that most junk bonds had in 2006". And if we’ve learned one thing over the course of this crisis, it’s that when a triple-A company sees spreads at that kind of level, it won’t keep that rating for long.
- If it wasn’t for the Fed stepping in to save the day, GE would have had a massive liquidity crunch already, simply incapable of rolling over its whopping $515 billion in liabilities. In other words, a large part of the triple-A is simply the moral hazard of GE being too big to fail — and since that’s the case, the government should by rights be getting paid for its de facto backstop. Instead, the shareholders are receiving $13.4 billion a year.
- GE’s creditors can no longer take solace in the fact that if push came to shove, GE could borrow against its assets in order to pay them off when their debts come due. GE’s unsecured debt is trading at high spreads, but there’s no indication that GE’s secured borrowing costs are any lower. After all, who has a long-term cost of funds low enough to make money lending to GE at low secured rates?
- Since it’s not a bank, GE has made zero efforts to mark those assets to market. There’s no doubt they’ve fallen a lot in value, but your guess is as good as mine when it comes to how much they’ve fallen in value. It’s probably not enough — yet — to wipe out GE’s equity, but it might well be enough to make that equity cushion so thin that a triple-A rating is no longer warranted.
The fact that GE reckons it can still pay a $13 billion dividend and be profitable is indication that it’s a relatively safe company, at least unless or until investors start trying to mark its assets to market. Now it’s not clear why they should do that, since those assets were always being held to maturity, and there’s no reason why GE should ever want to sell them off. But on the other hand, there’s also no reason why shareholders should consider those assets to really be worth par — which is what GE is reporting.
In any case, no company with half a trillion dollars of liabilities can sensibly have a triple-A rating in this market: GE is simply too leveraged to justify such a thing. Which is maybe why, at $12.55 a share, the stock is at its lowest level since 1996.