This morning, the giant conglomerate exited the now-even-more-select ranks of companies with a AAA bond rating. S&P announced that is was downgrading the company's debt to AA+, with a note that it mostly meant you should start worrying about GE's long-term debt . . . though not worrying very hard.
What happened next was surprising, in a "What the goddamned $@%! hell just happened?" sort of way: the stock price rose 8%. This is about 1600 basis points more than you would expect. The market had clearly already priced in the risk of a downgrade, and Immelt's statement that the company was prepared to operate as a AA+ company sounded soothing even to me.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
Maybe investors are encouraged that it was only downgraded to AA+ rather than something worse, like BBB.
I wasn't surprised by the gain after downgrade. I had already priced into GE with a larger downgrade (though hopefully high enough to avoid the spiral of death).
Does anyone actually think a vapid post like this is useful? Megan: you get paid for this??
Most investors probably thought along the lines of libfree above.
So who's left with AAA-ratings? Off the top of my head: BRK, XOM, ADP, TM... am I missing any?
Mac you're smart but you'd be consistently a day late and a dollar short as a trader...not good btw.
This downgrade was one in name only.
I'm with tompain on your analysis.
k1
k1 - you're an idiot - do you think **any** journalist could be a successful trader - do you harrass other journalists about it?
libfree got it right
and Megan this **is** pretty obvious.
This question may be crazy, but here goes; at what price does the break-up value of GE become large enough, compared to current capitalization, that someone would want to buy it, lock, stock, and soon to be dismantled barrel? I think the cap value as down to around 60 billion recently; were we close? I realize that a lbo may be er...problematic in this environment, but it is interesting to see a company, which makes a lot of diverse stuff that people are still going to want to buy, have it's market cap fall off a cliff, in good part due to it's involvement in a finance industry where the government is stepping in and taking on mountain ranges of bad debt.
Will Allen,
GE's market cap is currently about $100 billion, but its enterprise value is about $565 billion. If you wanted to own it "lock, stock, and barrel" you'd have to take into account its net debt, as the enterprise value does. An imperfect analogy: if you wanted to own my condo "lock, stock, and barrel" it wouldn't be enough to just buy out my equity in the place; you'd have to pay off my mortgage too. Of course, you could do that by taking out your own mortgage (an LBO, in effect), but then you wouldn't own the place "lock, stock, and barrel": you'd have that mortgage debt hanging over your head, and the bank (or other owner of your loan) would be in a position to take the condo away from you if you couldn't service that debt. Similarly, if you just bought up all of GE's equity, you'd still its debt hanging over you (to say nothing of the additional debt from the LBO).
Do people still make investment decisions based on S&P ratings? I thought they were just a quaint system for Monday morning quarterbacking a company's recent performance.
You said GD, you said Hell, what was the "$@%!" supposed to stand for?
Yeah, David, I didn't mean to imply that I thought a buyer could just ignore the debt, but I also hadn't checked, being too lazy, what their actual debt load was. Thanks.
Still, I wonder if some political entrepreneur in this envoronment could figure put a way to lay a huge chunk of the debt onto the finance arm of GE, and then lay the fianance arm onto the taxpayer, under the guise of saving GE's manufacturing jobs. Hell, at least GE makes stuff which they can, unlike GM and Chrysler, sell at a profit. Mind you, I'm not saying I would favor such a development, only that the interesting times we live in could lead to some strange and distatsteful opportunities for the politically gifted/connected.
I wonder if the market has already priced in AA+ U.S. savings bonds.
"I wonder if the market has already priced in AA+ U.S. savings bonds."
Since when has there been a secondary market where U.S. savings bonds are traded? You take your savings bond to the local bank, they use the Treasury Department's calculator to figure out what it's worth, and cut you a check. I've never heard of market prices for savings bonds.