General Electric, the next "fallen angel" ?
For more than a month, General Electric (BBB+) has been drawing the attention of the Investment Grade and High Yield markets in the US as well as Europe.
General Electric is a historic American conglomerate that achieved the highest valuation in the world in 2001, with capitalisation in excess of $500 billion, and now seems to be nearing the end of the cycle. The group is also one of the most complex, operating globally on a dozen different segments, with a major financial services subsidiary, GE Capital, that has both a complex structure and enormous leverage.
With $115 billion in gross debt, General Electric is the 10th largest issuer of US Investment Grade bonds (BoA index). In addition to the debt burden, the group has provisioned $22 billion for an ongoing investigation by the SEC, and has $12 billion in debt maturing in 2019. All of this together has stoked major uncertainty over the group’s situation, driving the bonds down 10-20 points in two months, according to the issuing entities, while shares have halved in value (-56% since January). Today, the group’s bonds are trading at the price of a B-rated bond (highly speculative investment).
Given the group’s systemic weight, the situation is worrisome to the entire High Yield market. With the debt it carries, if GE moved into High Yield, a three-notch downgrade, it would be the largest issuer with debt amounting to 3.7% of the index. Market players agree that the High Yield market would have a great deal of trouble collecting that kind of debt.
Nonetheless, we do not expect General Electric to move into High Yield in the short or medium term, for several reasons:
- General Electric is still turning a profit on most of its businesses, and can – and should – restructure.
- GE’s capacity to deleverage will keep it out of High Yield. The group can easily reduce its debt by raising at least $20 billion in the short term, through a possible IPO of the Healthcare portion (up to 40%), or by selling its stake in Baker Hughes, cutting its dividend, etc.
- The weight of General Electric’s debt in the Investment Grade loan portfolios of Wall Street’s five largest banks can provide support in avoiding liquidity problems. On the single $19.8 billion line of credit expiring in 2020, guaranteed to GE by six banks (out of a total of $41 billion in credit lines), Morgan Stanley makes up 6% of its Investment Grade loan portfolio, and Goldman Sachs 4%.
For the above reasons, we are confident that the group is capable of deleveraging over the short and medium terms and, as a result, the market reaction seems exaggerated and more reflective of the tighter bond climate in recent months.
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