By By Scott Malone and Karen Brettell
The ratings agency upheld its current top-shelf ratings on the world's largest maker of jet engines and turbines that produce electricity, as well as its GE Capital finance arm, the outlook of which also went to "negative."
GE shares closed down 8.22 percent at $15.96.
"The negative outlook is based partly on the concerns regarding General Electric Capital Corp's future performance and funding," S&P said in a statement.
"Fundamentals-based earnings and cash flow could decline sufficiently during the next two years to warrant a downgrade," the rating agency said. "There is at least a one-in-three possibility of a downgrade within the next two years."
GE Capital, with businesses ranging from investing in commercial real estate to private-label credit cards, has emerged as a weak spot in the conglomerate's portfolio this year. The finance business has been hammered by the global credit crisis and recorded profit declines that more than offset growth at its heavy industrial units.
BRUTAL ENVIRONMENT
S&P's action reflects the current macroeconomic environment, said Brian Langenberg of Langenberg & Co, who holds GE shares.
"The only way you can look at this is not as a GE event by itself but in the context of what is looking to be at the very least the biggest economic downturn since 1982 and quite possibly worse than that," Langenberg said.
"If the economy gets worse, that one-in-three becomes one. You have to acknowledge that reality."
A spokesman for GE, based in Fairfield, Connecticut, said GE believed its rating would be secure so long as it met the financial targets it spelled out to investors on Tuesday.
"This is completely consistent with what we've laid out as our goals and plans for 2009, and we have a plan that we're confident in," said GE spokesman Russell Wilkerson. "They have affirmed the rating, so that's important."
GE has repeatedly emphasized over the past year its commitment to maintaining its triple-A rating, with Chief Executive Jeff Immelt most recently defending it to Wall Street analysts on Tuesday when he was asked if he prioritized the rating over the dividend.
"I frequently get the question, 'What do you favor more, the AAA or the dividend?' And I always give the answer, 'Both,'" Immelt said. "The AAA is a philosophy of how you run the company. In other words, I've always liked the discipline around the AAA."
The top-shelf rating gives GE cheaper access to credit.
S&P said, "GE's commitment to maintaining the highest credit quality, the still-solid prospects for many of its business segments, and the company's ample financial flexibility should continue to support our ratings."
On December 2, Moody's affirmed its triple-A rating on GE with a stable outlook.
SHARES TUMBLE
GE shares have lost 57 percent of their value so far this year.
GE Capital's borrowing costs have soared. For example, its 6.75 percent bond due 2032 is trading at 345 basis points over U.S. Treasuries, compared with a spread of around 145 basis points at the beginning of the year, according to MarketAxess.
The cost of insuring GE debt with credit-default swaps rose after S&P's announcement. The cost to insure $10 million of GE debt for five years with credit default swaps rose to $420,000 from $395,000 before the announcement, according to data from Phoenix Partners Group.
S&P has given only six U.S. nonfinancial companies its top rating -- GE, Johnson & Johnson
(Reporting by Scott Malone in Boston and Karen Brettell and Walden Siew in New York; Editing by James Dalgleish)
