Updated from 1:35 p.m. EDTGeneral Electric ( GE) lost its pristine credit rating from S&P on Thursday, the latest in a series of events that have shaken confidence in the industrial giant's financial health. S&P downgraded GE's top-notch "AAA" rating one tick to an "AA+," almost two weeks after the firm cut its dividend by more than one-third to 10 cents a quarter. Fears about GE Capital, the company's finance arm, had pushed GE's GE stock down to fresh lows not seen in over 10 years. However, its shares surged 12.7% to close at $9.57 Thursday, as investors factored in the company's strong rebuttal to the downgrade. Short sellers covering their positions likely played a part in making GE the leading component in the Dow Jones Industrial Average as well, as the DJIA gained nearly 100 points.
Chairman and CEO Jeffrey Immelt has repeatedly sought to soothe investor fears by insisting that GE's earnings and cash flows are strong enough to warrant top-level ratings. "As we have previously said, we are prepared to fund the company as a double-A, but we will continue to run GE with the disciplines of a triple-A company, which means low leverage, high liquidity and strong risk disciplines," Immelt said in a statement following the downgrade. "While no one likes a downgrade, this review and rating reaffirm the relative strength of the company." But Immelt's credibility has been tarnished by similar assertions that GE would not cut its dividend, just weeks before doing so. It was unclear whether S&P's downgrade would warrant a similar move from Moody's. The cost for an investor insuring against GE defaulting on debt did not change much on Thursday, according to credit-data sources, but still remained expensive on a historical basis. A lower credit rating makes it more difficult and expensive for a company to borrow money in the debt markets, especially in light of distressed credit environment. The situation does not bode well for GE, which needs to conserve capital and strengthen its financial position to regain confidence. GE said it does not expect any "significant operational or funding impacts" from the ratings downgrade, and noted that it has taken steps to shore up its liquidity and balance sheet. The firm built $48 billion in cash, raised more than 90% of long-term debt needs and reduced commercial paper financing by 32% to $60 billion.