STREAMING NOW: Watch Now

GE's debt headaches are growing

General Electric's debt headaches are growing.GE's debt-riddled balance sheet already ...

Posted: Nov 2, 2018 3:59 AM
Updated: Nov 2, 2018 3:59 AM

General Electric's debt headaches are growing.

GE's debt-riddled balance sheet already forced out its CEO, led the storied company to slash its cherished dividend to a penny and prompted the sale of century-old businesses.

Banking, finance and investments

Business and industry sectors

Business, economy and trade

Commercial and residential property

Commercial property

Companies

Company activities and management

Diseases and disorders

Financial markets and investing

Financial performance and reports

Financial ratings

Financial results

General Electric Co

Headaches

Health and medical

Real estate

US dollar money markets

Now, GE's mountain of debt, caused by years of poorly-timed acquisitions and bad decisions, is forcing the company to wean itself off the $1.1 trillion commercial paper market in favor of more expensive bank financing.

It's an abrupt shift because GE (GE) was long one of the biggest issuers of commercial paper, a form of cheap short-term borrowing that businesses rely on to pay employees and finance inventories. Recall that GE was severely hurt when the commercial paper market froze during the 2008 financial crisis. Eventually the Federal Reserve stepped in with a rescue.

The top tier of the commercial paper market is only open to companies with the sturdieset balance sheets. GE and its $115 billion of debt no longer qualify.

GE lost access to the top tier after Moody's Investors Services downgraded the company's short-term credit rating on Wednesday in part because of its "deteriorating" power business. The downgrade followed a similar move by S&P Global Ratings in early October.

GE can still tap the second tier of the commercial paper market, but that corner of the market is smaller and more expensive. It's probably not big enough to meet all of GE's vast funding needs, according to Rene Lipsch, senior credit officer at Moody's. GE and GE Capital issued as much as $14.8 billion in commercial paper last quarter.

"Due to GE's high intra-quarter funding needs," Lipsch wrote in an email, "GE will have to utilize its revolving credit facilities, which will result in an increase in funding costs."

In other words, GE's borrowing costs are going up because of its weakened balance sheet.

"Nobody leaves" commercial paper "voluntarily," Carol Levenson, director of research at Gimme Credit, a corporate bond research firm, wrote in an email.

GE shares slumped 5% on Thursday and closed below $10 for the first time since March 2009.

Reduced flexibility

GE announced its retreat from the commercial paper market on Tuesday, a day before the well-telegraphed Moody's downgrade. Jamie Miller, GE's chief financial officer, said the plan is to reduce GE Capital's commercial paper balance to zero by the end of the year and reduce the overall company to a "smaller" level as well.

The good news is that GE has already been moving to shrink its short-term borrowings. And GE has $40 billion of credit lines with banks that it can use to fund the business. Miller said GE has tapped a "portion" of these revolvers.

The problem is that bank lines are more expensive and restrictive than the commercial paper market, which allows companies to quickly refinance their debt.

"This is a sign of reduced financial flexibility," Levenson said.

"GE has a sound liquidity position, including cash and operating credit lines," a GE spokesperson said in a statement. "The downgrade is manageable and we are prepared for it."

GE added that it's committed to strengthening its balance sheet by reducing leverage.

Dividend cut not enough

The painful dividend cut announced on Tuesday will save GE about $4 billion a year. The company is also planning to raise about $20 billion by getting rid of various businesses, including the healthcare division and its majority stake in oil and gas firm Baker Hughes.

However, those sales -- combined with the deep problems in its power division -- will also decrease GE's earnings firepower.

Despite GE's shrinking profits, its debt still remains hefty. GE and GE Capital listed total borrowings of $115 billion at the end of the third quarter, compared with $126 billion at the end of 2017.

After posting weaker-than-expected results on Tuesday, GE pushed back the timing on when it will achieve a stronger balance sheet. The company's new goal is to reduce its debt-to-earnings ratio to 2.5 over the "next few years." GE previously said it would hit this healthier leverage target by 2020.

GE is under pressure to clean up its balance sheet soon. In an SEC filing, GE warned that further downgrades could lift borrowing costs and potentially affect access to capital markets. The company said it could also be forced to post additional capital or collateral, hurting its capital position and liquidity.

West Lafayette
Clear
63° wxIcon
Hi: 77° Lo: 52°
Feels Like: 63°
Kokomo
Clear
60° wxIcon
Hi: 75° Lo: 51°
Feels Like: 60°
Rensselaer
Clear
55° wxIcon
Hi: 75° Lo: 50°
Feels Like: 55°
Fowler
Clear
55° wxIcon
Hi: 75° Lo: 51°
Feels Like: 55°
Williamsport
Clear
55° wxIcon
Hi: 76° Lo: 50°
Feels Like: 55°
Crawfordsville
Clear
57° wxIcon
Hi: 76° Lo: 51°
Feels Like: 57°
Frankfort
Scattered Clouds
60° wxIcon
Hi: 75° Lo: 51°
Feels Like: 60°
Delphi
Clear
57° wxIcon
Hi: 76° Lo: 51°
Feels Like: 57°
Monticello
Clear
57° wxIcon
Hi: 77° Lo: 51°
Feels Like: 57°
Logansport
Clear
54° wxIcon
Hi: 75° Lo: 50°
Feels Like: 54°
Mainly Dry and Warmer Rest of the Week.
WLFI Radar
WLFI Temps
WLFI Planner

Indiana Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 112626

Reported Deaths: 3520
CountyConfirmedDeaths
Marion20832759
Lake10292318
Elkhart6415109
St. Joseph6156102
Allen6029200
Hamilton4724109
Vanderburgh344530
Hendricks2673122
Monroe247436
Tippecanoe226913
Johnson2268123
Clark215056
Porter207845
Cass19329
Delaware188261
Vigo178123
Madison159575
LaPorte137739
Floyd131461
Howard128563
Kosciusko120217
Warrick119936
Bartholomew115357
Marshall98924
Dubois95418
Boone95146
Hancock91143
Grant89133
Noble89132
Henry77024
Wayne74414
Jackson7409
Morgan70038
Shelby66529
Daviess64427
Dearborn63228
LaGrange63111
Clinton59212
Harrison56024
Putnam53710
Lawrence50528
Montgomery50521
Knox5019
Gibson4854
White48114
DeKalb45611
Decatur45439
Miami4263
Fayette41813
Greene41835
Jasper3862
Steuben3707
Scott35610
Sullivan33012
Jennings31212
Posey3060
Franklin29925
Clay2935
Orange28524
Ripley2838
Carroll27013
Wabash2618
Washington2611
Starke2537
Whitley2526
Wells2482
Adams2453
Jefferson2443
Fulton2342
Huntington2223
Tipton21722
Spencer2153
Perry21413
Randolph2087
Jay1730
Newton17111
Owen1651
Martin1640
Rush1524
Pike1401
Vermillion1260
Fountain1182
Pulaski1151
Blackford1133
Crawford1030
Brown1023
Parke941
Benton880
Union770
Ohio767
Switzerland700
Warren391
Unassigned0225

COVID-19 Important links and resources

As the spread of COVID-19, or as it's more commonly known as the coronavirus continues, this page will serve as your one-stop for the resources you need to stay informed and to keep you and your family safe. CLICK HERE

Closings related to the prevention of the COVID-19 can be found on our Closings page.

Community Events