General Electric Co. (NYSE: GE) found itself in the news over the long weekend in a manner that it would rather not be in. GE has not had its old prized AAA corporate credit rating since 2009, and its rating at Standard & Poor’s in 2020 is down to BBB+ as its problems have persisted. GE saw its rating outlook move to negative from stable on April 10, and now GE is taking actions that will look like a refinancing of some debt to solidify the conglomerate’s financial position.
Last week’s news was after GE withdrew its prior guidance for a weaker 2020. S&P put its BBB+ outlook on negative watch along with its A-2 short-term rating for the parent company and GE Capital. S&P maintained the formal ratings with the understanding that GE could see increased debt leverage to reach a “mid- to high 3.0-times range” in fiscal 2020 with an expectation that it will go down under 3.0 in 2021 as GE deploys excess cash toward debt reduction and some recovery in aviation (engines). The negative outlook is on a one-in-three chance that GE’s debt leverage may not come down under 3.0 in 2021.
GE’s response has been to prepare a new debt offering that aims to extend maturities in the extremely low interest rate environment. It will simultaneously be making tender offers on its shorter term debt due out to 2024 that is closer to maturity. According to GE, the move will enhance GE’s liquidity profile and the move is said to be “leverage neutral.”
GE also will use proceeds from its recent BioPharma transaction with Danaher, and GE showed that it has also repaid $6 billion of an intercompany loan to GE Capital on April 1, 2020. GE Capital launched a tender for up to $9 billion worth of debt maturing in 2020, and GE Capital was shown to have repaid about $4.7 billion of debt that matured in the first quarter of 2020.
Despite GE withdrawing guidance, the formal results for the first quarter of 2020 have not yet been released. GE indicated that, as of March 31, 2020, the consolidated cash and cash equivalents, along with restricted cash, were more than $47 billion. Approximately $34 billion of that total was in GE’s industrial side of the business, and it also held about $13 billion for GE Capital.
One last effort, which GE’s press release said was “part of its normal financial management process,” the company said it was also refinancing a backup credit facility that expires in 2021.
Larry Culp, Jr., board chair and chief executive of GE, said:
With net proceeds of about $20 billion from the sale of BioPharma now in hand, we are taking swift actions to de-risk and de-lever our balance sheet and prudently manage our liquidity amid a challenging external environment. We continue to execute on our priorities, including solidifying our financial position by further reducing debt and improving our cash operations and management. We remain committed to achieving our leverage goals over time.
GE investors have every right to be worried about yet another corporate credit rating cut. The negative watch does not classify as a formal downgrade, but at BBB+ it only has two notches of ratings support before becoming a speculative rating, or junk bond status. Needless to say, that would drive up GE’s borrowing costs handily. For one additional concern, the new economic environment under COVID-19 is far more challenging than any year in the prior decade.
General Electric stock traded down 3% at $6.91 early Monday, in a 52-week range of $5.90 to $13.26. GE’s shares were above $13 as recently as mid-February.
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