For all intents and purposes, GE (GE) lost its AAA rating in December, when S&P put it on “watch” (or whatever the company calls the “run-for-the-exits-but-we-don’t-want-our-clients-to-be-mad-at-us-yet” rating). But, legally, it still has it.
So what will happen when the rating agencies finally conclude it’s safe enough to stop denying reality?
Among other things, GE will have to post a bunch of its precious cash ($48 billion total) as collateral.
Bloomberg: GE Capital may be required to post as much as $12 billion if the long-term ratings are reduced four to six levels into the single-A category and short-term ratings fall below A1/P-1, [Richard] Hofmann 9of CreditSights] estimates based on GE’s filings. Nicholas Heymann, an analyst with Sterne Agee & Leach Inc. in New York, estimated in a note March 3 that GE may need more capital to cover losses of between $21 billion to $54 billion in the next several years.
Investors also are worried about the quality of GE Capital’s $637 billion in debt, particularly loans at its real estate division and in slowing economies such as Eastern Europe. GE’s Wilkerson said total financial assets in Eastern and Central Europe are about $26 billion.
Now, this isn’t an AIG-type situation, where the posting of collateral will immediately bankrupt the company. But if analyst Hofman is right, one-quarter of the company’s cash will no longer be usable.