By BankingMyWay.com Staff
Much like a consumer credit rating, a corporate credit rating is an evaluation of an entity’s capability to repay debts and meet financial obligations.

The three top rating agencies are Moody’s, Standard and Poor’s and Fitch. These agencies evaluate the balance sheets and current market conditions to determine the credit risk of companies. Credit ratings are used to facilitate investment and companies often go to great lengths to secure and maintain high credit ratings. The triple-A credit rating (AAA or Aaa) is the highest rating and represents the lowest amount of risk.

Just this March, the tough economic conditions claimed General Electric Co.’s (Stock Quote: GE) decades old triple-A rating from Moody’s. The move was forecasted earlier in the month when Standard and Poor’s also downgraded the conglomerate. Moody’s now has a GE rating of Aa2 while S&P has it one notch higher at AA+.

GE’s prized triple-A rating had entitled it to bargain basement financing, but that privilege is now gone. It will now cost GE more to acquire capital. Long-term fallout from the downgrade is still somewhat unclear. When American International Group (AIG) (Stock Quote: AIG) lost its triple-A rating in 2005 it was the beginning of a downward spiral for the insurer. Ambac Financial Group (Stock Quote: ABK) also experienced a similar decline after it lost its AAA rating in 2008.

Few are predicting similar circumstances for GE, however, for a number of reasons. For one, GE is one of the world’s biggest industrial businesses. It produces power-plant turbines, airplane engines, medical imaging equipment, appliances and even light bulbs. The non-finance businesses that make up GE are strong and would be worthy of the triple-A rating on their own.

The real problem for GE has been its financing arm, GE Capital. Like most financial companies, GE Capital was strongly impacted by the credit crisis. GE Capital contains businesses in sectors vulnerable to sharp losses from deteriorating economic conditions, like private-label credit card and commercial real estate. GE Capital has already experienced significant credit card delinquencies. In the last year prior to the downgrade, GE shares fell 75% and the shareholder payout was reduced from 31 cents to 10 cents at the end of February.

According to Moody’s analysts, if GE were on its own, it would be rated in the mid single-A category. It has benefited from its parent company’s strength even as the parent company has suffered. Still, both GE and GE Capital are still considered “strong” investment grade companies.

While General Electric may have lost its pristine credit rating, it hasn’t left many other companies at the highest level. To date, there are only six other companies who still have AAA ratings.

After its downgrade, GE stock price actually rose by more than $1. That said, if the country heads into a recovery, demand will likely rise for both financing and GE products. Of course, now that the triple-A rating is gone, GE will have to pay more for financing costs.

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