Berkshire, GE Lose Top Credit Ratings
Friday, March 13, 2009
General Electric and Berkshire Hathaway yesterday lost their places on a prized short list of the healthiest corporations.
The ratings agency Standard & Poor's, which evaluates the safety of lending money, said that General Electric no longer numbered among the companies most likely to repay its debts. GE was downgraded one notch from the highest S&P rating, AAA, which could force it to pay higher interest rates to investors.
Fitch, a smaller agency whose ratings are used by fewer investors, removed Berkshire Hathaway from its highest category.
Both agencies said the downgrades reflected the impact of the global recession. GE and Berkshire are sprawling conglomerates with diverse holdings, but their profits in recent years came heavily from selling financial services. GE is among the world's largest lenders; Berkshire, among the largest insurers. The crisis in the financial industry has shaken both companies from longstanding records of consistent and massive profitability. The downgrades both reflect and exacerbate those difficulties.
S&P said that GE's other businesses remain strong, but it was concerned about rising losses at the financial unit, GE Capital, which finances aircraft and industrial equipment, provides banking services to corporations and offers consumer loans including credit cards and mortgages.
GE Capital made much of its money by trading on the reputation of its parent company, which allowed the unit to borrow at low cost. Now its losses will cost GE that rating, which it had held since 1956, further straining GE Capital's ability to make money.
GE said in a statement that it did not expect the downgrade to have a significant impact on its operations or its funding model.
"While no one likes a downgrade, this review and rating reaffirm the relative strength of the company," chief executive Jeffrey R. Immelt said.
Some financial analysts had predicted a larger downgrade, and GE's share price rose 13 percent after the S&P announcement, closing at $9.57.
Moody's, the other major ratings firm, has said that it is reviewing its own Aaa rating for GE, which dates back to 1967.
Berkshire Hathaway retains the highest rating from both S&P and Moody's, but the downgrade by Fitch -- which often acts faster than its larger rivals -- reflects the mounting pressure on the company. Like GE, Berkshire's profits depend heavily on its reputation, which reassures its insurance customers and allows it to borrow money at low cost.
But Berkshire has bet billions of dollars through derivative contracts tied to the performance of stock markets and financial instruments, and Fitch said that it couldn't regard a company so heavily engaged in financial services as among the safest borrowers.
Fitch also noted the risk of the company's dependence on its chief executive, Warren Buffett, who is also a director of The Washington Post Co.
Following GE's downgrade by S&P, only four companies other than Berkshire retain the highest ratings from Moody's and S&P: American Data Processing, Johnson & Johnson, Exxon Mobil and Toyota.