March 12 (Bloomberg) -- General Electric Co. shares and bonds rallied after Standard & Poor’s lowered its debt ratings one level and raised the outlook to “stable,” comforting investors concerned about a possible sharper cut.

The switch to AA+, from AAA and with a “negative” outlook, affects long-term debt, S&P analysts said in a statement today.

GE, which held the top rating since 1956, said in a statement it doesn’t foresee “any significant operational or funding impacts.” The Fairfield, Connecticut-based company’s shares rose $1.08, or 13 percent, to $9.57 at 4:15 p.m. in New York Stock Exchange composite trading.

“A one-notch downgrade and ‘stable’ mean you can take away the ratings as an issue for the time being,” said Stephen Tusa, a JPMorgan Chase & Co. analyst in New York. If S&P had kept the negative outlook, “it would have lingered as an issue.”

The global recession and credit crunch have hurt profit at GE and its finance arm, raising investors’ concern that the parent would have to seek more outside funding to support GE Capital.

Chief Executive Officer Jeffrey Immelt until January was saying that GE generates enough earnings to justify keeping both its annual dividend and the AAA, an endorsement that a company is among a handful of the world’s safest and strongest. On Feb. 27 he reduced the shareholder payout for the first time since 1938 in a move to save about $9 billion a year.

Parent and Finance Arm

Robert Schulz, the S&P analyst who oversees the GE parent company, said in an interview that the ratings committee balanced the “excellent risk profile” of GE’s industrial businesses against the prospects of weaker earnings or a “modest net loss” at GE Capital.

“We’re not expecting any real earnings or cash flow from GE Capital this year or next year,” Schulz said. Without the support of the parent company, GE Capital’s rating would be an A, lower than the previous A+ assessment, S&P said.

S&P left GE and GE Capital’s commercial paper ratings at A- 1+ and said the rating for debt backed by the Federal Deposit Insurance Corp. remains AAA.

GE Capital’s $3 billion of 5.625 percent notes due in 2017 rose 1.8 cents to a two-week high of 83.3 cents on the dollar, according to Trace, the bond-pricing service of the Financial Industry Regulatory Authority. The notes were the most actively traded on Trace and yielded 8.42 percent.

‘Delightful Outcome’

S&P’s move was a “delightful outcome,” because some investors expected the cut to leave GE’s ratings two or three levels lower and still under review, said Gary Cloud, who helps oversee about $500 million of debt including GE Capital notes at the AFBA Funds in Kansas City, Missouri. It also tamped down speculation about a possible GE Capital spinoff, he said.

“The most important aspect isn’t so much the actual rating cut, because everybody knew it was coming, but that they have a ‘stable’ ratings outlook after the review,” Cloud said in a telephone interview. “My guess is the only way S&P could have gone to a stable rating is that if they received, at least for the near term, unending assurances by the parent that they wouldn’t spin them off.”

Credit-default swaps protecting against a default by GE Capital fell 0.75 percentage point to a mid-price of 8.25 percent upfront, according to CMA DataVision. That’s in addition to 5 percent a year, meaning it would cost $825,000 initially and $500,000 annually to protect $10 million. The contracts have dropped from a record 20 percent upfront on March 4.

GE Capital Transparency

The shares dropped 72 percent in the past 12 months and traded below $6 on March 4, the lowest since December 1991, as some investors and analysts criticized the company for a lack of transparency at the GE Capital finance arm. Investors are concerned that the unit, already facing rising credit-card delinquencies and $4 billion in unrealized property losses, will require more capital than GE anticipates.

The company has scheduled what it calls a “deep-dive” meeting with analysts for March 19 to give more detail about GE Capital holdings.

Standard & Poor’s in December said GE had a 1-in-3 chance of losing its top AAA designation within two years, and S&P kept GE’s “negative” outlook after the dividend reduction. Moody’s Investors Service put GE on review in January and, after the dividend cut, said it would keep studying GE’s debt for a possible lower rating than its top-level Aaa.

John Cline, a spokesman for Moody’s, declined to comment on the status of its review of GE.

Ratings Services

“The rating agencies are catching up to the reality within the finance operations at GE,” said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York, citing the global slowdown.

The global recession and credit crisis may lower odds GE Capital can make its $5 billion profit goal this year and that demand will hold up for GE’s goods as the world’s largest maker of jet engines, power turbines and medical-imaging equipment.

General Electric had held S&P’s AAA since 1956, the year Immelt was born. The company has had Moody’s Aaa top rating since 1967. Today’s downgrade squares with what investors already see: GE has traded for six years as though its bonds were less than the highest rating.

Immelt, 53, said in a March 5 interview that a ratings drop won’t change the way he runs the company or alter his plan to shrink GE Capital to produce a lower percentage of the parent’s profit.

Immelt Strategy

“I will run GE with reduced leverage, reduced commercial paper, and earning money in GE Capital, which have long been the elements of being a AAA,” Immelt said in the interview. “I’m going to continue to run the company, the same as I’ve always run the company which is with that kind of discipline.”

Under debt instrument guarantees and covenants, GE would have to post additional collateral if the ratings were cut below AA-/Aa3 or A-1 and P-1, or four levels, the company said in its annual filings with the U.S. Securities and Exchange Commission last month.

GE said in December it may generate as much as $16 billion in cash after capital expenses this year, mainly from the sale of industrial goods, more than enough for the annual dividend payout. GE’s non-finance businesses had $16.7 billion in free cash flow from operations in 2008, after capital expenditures.

GE Capital posted $8.6 billion of the parent company’s $18.1 billion in profit last year and predicts it will earn $5 billion this year. Chief Financial Officer Keith Sherin said Feb. 10 that projection exceeds most analysts’ forecasts.

Dividend Cut

Immelt and GE’s board last month decided to cut the quarterly dividend by 68 percent, to 10 cents a share from 31 cents. The decision will free up about $4.4 billion in this year’s second half, the company said. GE has paid a dividend in each of the past 110 years.

On Sept. 25, GE reduced its annual profit forecast for a second time and suspended its stock buyback. A week later, GE got a $3 billion investment from investor Warren Buffett’s Berkshire Hathaway Inc. and said it would sell $12 billion in common stock.

With today’s downgrade, the number of U.S. non-financial borrowers with the top rating from S&P shrank to five from 60 in 1982: Automatic Data Processing Inc., Exxon Mobil Corp., Johnson & Johnson, Microsoft Corp. and Pfizer Inc.

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net.

Last Updated: March 12, 2009 17:54 EDT