GE's Additional Long-Term Capital Raised on the Cheap, or Was It?
There once was a time where General Electric Co. (NYSE: GE) was among the most important companies in America. After two decades of portfolio shuffling and reshuffling, and with a new entrenched team, GE is trying to rebuild itself and restore its reputation as an industrial conglomerate.
GE announced on Monday night that it was reopening a prior debt offering from GE and for GE Capital in the amount of $3 billion. What should stand out here is beyond that these are 30-year maturity bonds out to the year 2050. GE’s coupon at issuance was just 4.35%. As for the “just” logic, GE has seen its credit ratings change drastically over time, and not for the better.
If there is one takeaway in mid-2020 about GE reshuffling its debt maturities, it should be how much more careful GE has to be in raising new capital.
These are being called “additional notes,” and $2.25 billion worth of these were issued back on April 22, 2020. The prior issuance and the new issuance are forming a single series of notes. Other than the initial offering price and the issue date, the notes have identical terms. They also have the same call and redemption features and the same CUSIP and ISIN numbers so that the series interchangeable.
GE did note that the transactions are expected to be leverage-neutral over time. GE plans to use the capital to lower its shorter-duration debt, effectively pushing more debt way out. Specifically, it noted repaying a portion of the company’s intercompany debt obligations to GE Capital and to reduce GE Capital’s outstanding debt.
All in all, with the aggregate offerings, GE believes that it will have enhanced its near-term liquidity profile by pushing out $4.2 billion of GE’s Industrial debt maturities and pushing out $4.4 billion of GE Capital’s maturities to date.
While GE led the risk factors about the weakness around the COVID-19 recession, other risk factors were also noted. Its end markets and operating results could see additional headwinds. Its earnings and cash flow have been negatively affected in aviation and from lower margins in GE’s Power and Renewable Energy businesses (even prior to the full impact of COVID-19).
In the past, GE may have been able to issue these notes for an even lower coupon. The 30-year was close to 1.60% around the second pricing of these notes, so the assumed 4.35% coupon would have represented a spread of roughly 275 basis points.
Fitch Ratings announced on Tuesday morning that GE’s $1.5 billion add-on to its underlying operations and the $1.5 billion add-on to GE Capital Funding will have no effect on its corporate credit ratings. Fitch also rated the 2050 and 2030 notes as BBB and assigned a Stable view on its rating outlook.
While Fitch was not making any changes on the outlook for the credit ratings, the agency currently forecasts that GE’s free cash flow will be negative in 2020, including −$2.2 billion in the first quarter and a second-quarter range of −$3.5 billion to −$4.5 billion. That said, as economic conditions begin to recover over the second half of 2020, its free cash flow improve, but it is unlikely to see positive free cash flow levels on an annual basis until 2021.
We have yet to see a note from Standard & Poor’s on the GE issuance, but it was just back in the first half of April that GE’s credit outlook was revised lower to Negative from a prior Stable view. That was of course when things were still very touchy, and its rating at the time was BBB+ after GE had warned that its adjusted earnings per share would be materially lower than its prior guidance that was before COVID-19.
Some firms have still remained positive on GE. A recent report showed that BofA Securities had it in the “cheap bin” as a sub-$10 stock with big upside, and that same price objective remains today. That call was even after GE’s outlook was facing more problems than upside.
Shares of GE were down 4% at $8.11 during the sell-off on Tuesday. Monday’s closing price of $8.46 is still down handily from its highs above $13 prior to the market peak in February. GE’s closing low at the height of selling was $6.11 on March 23, but while it quickly returned to $8 in a few days, it was short-lived because GE shares went back down under $6 in May.
GE always has been a difficult business to understand and to explain easily. It may not be as complicated an operation in 2020, but GE is still a difficult business for any investor to explain the ins-and-outs of the operations without a company presentation in front of them.