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GE downgrade will lift its costs in a debt market it once ruled

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Any increase in GE's borrowing costs adds more pressure to a company that is already suffering. It is facing sluggish demand for its gas turbines, flagging cash flow, and probes from the SEC.

New York

GENERAL Electric Co may have to pay a little more the next time it wants to make payroll.

The manufacturing giant lost the near-top credit ratings on its short-term debt on Tuesday. That downgrade is likely to force the company to pay more to borrow in at least one credit market, namely the market for bonds known as commercial paper.

GE relies on that market to help fund its daily operations, and it used to be one of the biggest issuers of the securities. The manufacturer had on average around US$16.6 billion of commercial paper outstanding during the second quarter. At the end of June, it had about US$115.6 billion of total debt, of which about US$6 billion was commercial paper, according to company filings.

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Any increase in GE's borrowing costs adds more pressure to a company that is already suffering. It is facing sluggish demand for its gas turbines, flagging cash flow, and probes from the US Securities and Exchange Commission. This week it replaced its chief executive officer with Larry Culp, the first ever outsider to head the company.

A GE spokeswoman was not immediately available for comment about commercial paper. But in reference to credit downgrades broadly, she said "GE has a sound liquidity position, including cash and operating credit lines." The company remains committed to strengthening its balance sheet, including reducing debt levels, she added.

S&P Global Ratings cut GE's short-term grade to A-2, a level below the top tier. That's a rating of commercial paper that some classic prime money market funds are reluctant to buy. Moody's Investors Service has GE at P-1, or equivalent to one step higher than S&P, and said on Tuesday that it may also cut the company's short-term ratings. With fewer funds interested in buying, the company will have to pay higher rates to sell its commercial paper, said Peter Crane, president of Crane Data, which tracks money market funds.

"They'll still be able to find buyers, but at a cost of course," Mr Crane said. On Monday, it cost 2.25 per cent for a top-rated corporation to borrow for 90 days, according to US Federal Reserve data. A2-rated companies paid 2.56 per cent.

One bright spot for GE: it has spent the last decade cutting its reliance on commercial paper. In 2008, the company had more than US$100 billion of the debt outstanding, making it one of the biggest issuers. But during the financial crisis, GE found its access to that market severely constrained, and vowed to change its liabilities. It turned to alternatives including longer-term corporate bonds and bank borrowing. BLOOMBERG