NEW YORK, Dec 7 (IFR/LPC) - Industrial giant General Electric faces a challenging 2019 as it looks to sell assets to reduce its massive debt load and salvage its investment-grade ratings.
The company’s bonds have stabilized after a brutal sell-off following downgrades to Baa1/BBB+/BBB+, which triggered forced selling by some buyside accounts that had limits on how much Triple B debt they can own in a single company.
But those bonds are still trading more like Double B rated junk debt, and some say it may be only a matter of time before the once top-rated blue chip conglomerate falls into high-yield.
“GE going to high-yield is far from unthinkable. It is a very real, if not likely, outcome. The story is much worse than the market is pricing in,” said Mike Terwilliger, a portfolio manager at Resource Alts.
Some predict a more sudden and disorderly sell-off in GE debt if the company is downgraded to junk than when the company transitioned to Triple B from Single A - partly because of its large size.
Around US$48bn of its bonds are index eligible - a lot for the high-yield market to absorb.
A downgrade to high-yield may also limit access to new credit lines, and the fear is that the situation may unravel before a wave of debt maturities kicks in from 2020 onwards.
Roughly US$14.5bn of GE bonds in the ICE BAML US Corporate Bond Index are expected to mature in the next one to three years, while US$19.6bn of bonds in the ICE BAML Global Corporate Bond Index mature in the same period.
Raising as much cash as possible from asset sales in the next few months is therefore critical.
New CEO Larry Culp said last month that sales would take place as a matter of urgency to help shrink the company’s US$115bn debt load. That followed the announcement of a huge US$22.8bn quarterly loss.
Some investors are hopeful, but there a number that are worried about how much GE will actually raise.
“You’ve just told the world. What if these go off at fire-sale prices?” said Jerry Paul, a portfolio manager at ICON Advisers.
An accelerated sale last month of its stake in oilfield services unit Baker Hughes smacked of desperation, some said.
GE raised US$3.8bn from the sale, but it coincided with a plunge in oil prices and has done little to support the company’s stock price, which hit a post financial crisis low of US$7.265 on November 26.
“They have the ability to spin off the healthcare business, and in principal they have a lot of valuable assets,” said Daniela Mardarovici, a fixed income portfolio manager at BMO Global Asset Management. “But the market is no longer willing to take that at face value. They want to see the proof.”
A lack of transparency is another issue.
Some analysts said it was worrisome there was no specific reference in the company’s 10-Q filing in November of the US$25bn in cash from asset sales that GE previously stated it hoped to raise by 2020.
“Asset value is overstated in looking at headline assets on balance sheet,” JP Morgan equity analysts said. They cut their share price target to US$6, but warned it could go lower.
Then there’s the struggles at GE’s power unit. It lost US$631m in the last quarter, and the company wrote down US$22bn in goodwill. But an investigation into that impairment by the Securities and Exchange Commission and Department of Justice has added to nervousness.
“It’s an incredibly complex story with liability uncertainty reminiscent of past market failures,” Terwilliger said.
GE has liquidity - it has roughly US$13bn of cash on its balance sheet - but bankers are concerned about the prospects for it slipping to high-yield, and potentially tapping its credit lines if its needs to get cash in the door.
It agreed to a US$19.8bn credit facility in June, replacing existing facilities agreed in January, raising the total amount available to the company to about US$40bn from US$37.5bn.
The new facility matures on December 31 2020.
“GE has put some fear into people. It’s a gigantic company with unsecured revolvers, a company that nine years ago was Triple A,” said one senior banker.
GE’s access to short-term debt has already been impacted.
“The reduction in our short-term ratings will result in GE transitioning to a split Tier-1/Tier-2 commercial paper issuer, which will reduce our borrowing capacity in the commercial paper markets,” the company said in a filing last month.
It said it would increase its use of revolving credit facilities for short-term liquidity needs, “which will result in an overall increase to our cost of funds”.
If GE needs to keep drawing on its revolving credit, it would signal liquidity problems and elevate market concerns.
“I’m not saying they are on the brink, but they are certainly stretched,” the banker said. “Lenders would flip out, because every bank is into GE and into them in size.”
Terwilliger said in the best case scenario, GE will only be able to hold on to low Triple B ratings.
“There was a time when GE had exceptionally higher return on equity driven by GE Capital, which helped feed capital to [the rest of the company] and turbocharge returns. Now, with GE Capital in wind down, GE is left with slow-growth, long-cycle businesses.”
“In a bullish outcome, the loss of cheap capital will slow the growth of the underlying industrial business. In a bearish outcome, the loss of capital and market confidence can result in a sudden and total collapse.” (Reporting by Natalie Harrison and Lynn Adler. Additional reporting by Joy Wiltermuth and William Hoffman. Editing by Matthew Davies)