How Companies Earn and Lose the Prized AAA Rating

GE now has a one-in-three chance of losing Standard & Poor's top-shelf grade.

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Only six nonfinancial companies hold the highly coveted AAA Standard & Poor's bond rating: General Electric, Johnson & Johnson, ExxonMobil, Automatic Data Processing, Microsoft, and Pfizer.

Now, there's a one-in-three chance that GE could lose that top-shelf grade, as S&P just lowered its outlook on the company to "negative" from "stable" (Still, it affirmed GE's AAA rating.) The warning stems from troubles in GE's finance arm, GE Capital, which has suffered in the credit crunch. S&P expressed concern that the conglomerate's earnings could be worse than expected over the next two years.

So how do companies earn (or lose) that top rating and why all the commotion? Essentially, those with a triple-A rating--the highest rating given--get cheaper access to credit. Investors also use the rating to gauge the risk of investing in the company's debt securities.

Standard & Poor's is just one of three agencies that deal in credit ratings. The other two are Moody's and Fitch (it's worth noting that Moody's affirmed GE's triple-A rating on Dec. 2 with a "stable" outlook.) A credit rating is different from a stock rating, in which analysts issue "buy" and "sell" recommendations. Credit ratings measure how likely companies are to pay back debt, which lets investors know the likelihood of getting their money back. Not surprisingly, AAA ratings generally go to large companies with vast financial resources. But the key is that companies with a top rating don't have to pay high interest rates to draw investments.