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Standard & Poor’s Ratings Services announced Thursday that it has revised its outlook on GE (NYSE:GE) and its units, including General Electric Capital Corp. [GECC], to Negative from Stable.

GECC, considered a core entity within GE, is one of the world’s most profitable and highly rated financial institutions. However, the unit currently faces extensive structural challenges and is expected to experience high credit costs in ‘09 versus ‘08 based on sharply lower earnings from its real estate operations.

While the conglomerate is still maintaining its “AAA” long-term and “A-1+” short-term counterparty ratings; S&P believes there is at least a one-in-three chance it will cut GE’s credit rating from the top ‘AAA’ tier within the next two years. The negative outlook is based partly on the concerns regarding General Electric Capital Corp’s future performance and its capitalization.

Excluding the potential for additional support from GE, we have always viewed GECC’s hypothetical standalone credit profile as being weaker than ‘AAA’; our current assessment is ‘A+’,” the rating agency said in a statement...

In addition, fundamentals-based earnings and cash flow could decline sufficiently during the next two years to warrant a downgrade.

S&P also noted that it will continue to monitor GECC’s execution strategy on its funding and liquidity plans in light of capital market turmoil. The rating agency believes GE has about $10 billion of cash that could be infused into the capital unit, beyond the $5 billion already contributed in December, and that added contribution would represent a significant further increase in the unit’s equity.

S&P’s latest report on GE suggests that the rating agency will continue for the time being to endorse GE’s “AAA” rating, but at the same time it is signaling that it’s prepared to reassess and issue a possible downgrade if the conglomerate’s overall outlook starts to further deteriorate in fiscal ‘09 or beyond.

General Electric shares tumbled 8% in recent trading on heavy volume to finish the session at $15.96, ($1.43).

Source: S&P Lowers GE Outlook - A Downgrade May Be Possible