Blain’s Porridge Extra – Is GE going to repay its debt?
“There is a difference in opinion between consensus estimates and equity/bond market who seem to be more sceptical. Consensus estimates are probably still too optimistic.”
GE is a victim of bad management. Former CEO Jeff Immelt put big bets on Fossil Fuels and didn’t notice the world had moved towards renewables and batteries. Demand for GE’s core Gas Turbine product has plummeted by 30% per annum – and its unlikely to ever recover. If they misread their core market – what else did Immelt and his gang of GE lifers get wrong?
GE Capital is another source of doubt – what multitude of sins are still wrapped and hidden within? Later than most, GE is discovering its financial services division cash machine could be cancerous. Meanwhile, the fact GE spent over $25 bln buying back its own stock – with borrowed money – should be a massive wake-up call across all bond markets. GE bought their stock at the top. The money is gone. Bond holders are banging on the door asking for the money back.
The bottom line is Immelt levered up the company and screwed up on multiple fronts. It doesn’t make him unique. But for GE, once the pinnacle of AAA corporate America, to be on the cusp of junk, is something no one expected – and that partly explains the unprecedent scale of the collapse in confidence in the credit. Shock and horror causes an over-reaction!
GE CDS
Past bad management can be overcome. Discount what the bankers are saying about their faith in the new management – committed lending facilities means GE has them by the short and curlies. The bottom line is GE has good businesses in Aviation, Transport and Healthcare. It is struggling in Oil & Gas, but could recover. Its Power division is obsolete. It’s spent years overpaying for acquisitions and will struggle to sell assets at full price to a sceptical market that knows it’s a distressed seller.
Its ratings are on the cusp of junk, but It’s still BBB+ and Stable across the three main agencies. Its leverage of 4x is likely to fall. $60 bln of net debt, and $15 bln EBITDA today will fall as divestitures reduce debt more than EBITDA.
Its also worth noting the GE Perp deal – while GE dropped its dividend to a penny, that was probably to avoid a dividend kicker that would have stopped it paying the Perp Dividend. A more truly horrible signal to send the market about GE’s robustness is difficult to imagine. And, as hedge funds and distressed players will be aware, if GE misses dividend payments, holders get the right to put their nominees on the board. (It’s interesting to note who big holders on that particular bond are….)
GE Perp Price
A new GE will likely be a shadow of what it once was. (My guess is GE will probably be broken-up/acquired and vanish – that’s what happens to corporate dinosaurs as they evolve out of unsustainable niches.) The aviation business (GECAS) is solid. The sale of Baker-Hughes stake and Healthcare is already underway.
GE is being managed to survive while it evolves into something much smaller and less significant.
Alongside faith in the management, there are significant tail-risks:
- Are there other “skeletons in the cupboard” of GE Capital?
- Could regulatory threats derail recovery?
- As it shrinks, its strategic importance to the US diminishes – does that make it more vulnerable?
- What happens if market confidence breaks?
- What risks do markets pose to its future?
Debt Repayment?
The key question for bond holders is will it repay its debts?
Despite the current market noise, GE is not in immediate debt crisis. It’s got enough money in bank and lending facilities to cover itself from a liquidity meltdown stemming from closure of the CP market. For once, the standby facilities are actually doing what they were intended for – covering the firm if its normal financing sources dried up.
In the short-term;
i) GE has got about $26 bln of its $116 bln debt pile to repay through 2020. Its got $40 bln in credit facilities and $6 bln in cash.
ii) It has announced a massive programme of asset sales
iii) It can continue to cut dividend, could do a rights issue, and sell whole divisions.
GE should struggle through 2020 on current form.
The Medium Term gets more interesting, and the outlook is more susceptible to managerial failure and rising “no-see-em” risk;
iv) What is the regulatory risk from DoJ and SEC actions against the firm? The current consensus is the sheer size of GE and importance to the US economy, means it will be treated lightly. As the company shrinks it becomes less important.
v) More mistakes and skeletons could be exposed – stock buybacks etc.
vi) The big risk is management failure, more shocks, and a declining debt position push the credit rating into junk. Falling Angel status will trigger a debt sell-off, probably creating contagion across corporate bond market.
vii) The global market environment is a major risk – if recession strikes in 2019/20 then all-bets on selling assets could be off, plunging the company towards downgrade.
Long Term it becomes more difficult;
viii) The key issue is management and the likelihood they can manage their way into a recovery. This will be apparent within a year or two. Any ongoing lack of clarity on management plans will damage sentiment.
ix) Distressed debt players are already gaming wind-down and bankruptcy scenarios, and what a Chapter 11 work-out.
Buy/Sell?
What’s our recommendation on GE?
On GE the market looks to have over-reacted, fuelled by some very negative bank analysis (including some from a bank in its’ loan group!). GE is currently the most actively traded name in corporate debt. We suspect the recent hardening in price is likely to continue and stabilise at a better level once we see immediate collapse is unlikely.
Then it’s follow the management, and keep a close eye on its run rate through lending facilities and debt.
Bill Blain
Strategist, Shard Capital