GE’s Credit Is Under Review for Downgrade by Moody’s
(Bloomberg) -- General Electric Co.’s credit rating was cut by S&P Global Ratings as two other ratings services said they were weighing similar downgrades, adding to the beleaguered manufacturer’s challenges the day after it appointed a new CEO.
The long-term rating was reduced to BBB+ from A, S&P said Tuesday in a statement. The new level, just three rungs above junk, reflects concerns that GE’s “power business will again cause cash flow and earnings to be below expectations,” S&P said, pegging the outlook as stable.
The cut -- and the potential higher borrowing costs that come with it -- piles pressure on new Chief Executive Officer Larry Culp, who was named Monday to succeed John Flannery in a surprise appointment. GE has lost more than $100 billion in market value in the past year while contending with a power-market slump, flagging cash flow, a deteriorating insurance portfolio and investigations by the U.S. Securities and Exchange Commission.
The decision by S&P follows moves by Moody’s Investors Service and Fitch to review GE’s ratings for possible downgrades. Moody’s said in a statement Tuesday that a cut “may not be limited to one notch.”
GE responded by email that it “has a sound liquidity position, including cash and operating credit lines. We remain committed to strengthening the balance sheet including deleveraging.”
The company’s notes maturing in November 2035, with a coupon of 4.418 percent, weakened relative to Treasuries. The bonds’ yield rose relative to benchmarks by 0.05 percentage point to 1.71 percentage point, according to Trace bond-price data.
The shares rose 2.4 percent to $12.38 at 1:50 p.m. in New York, following Monday’s 7.1 percent rally in the wake of Culp’s appointment.
The gas-turbine unit’s “dimmer prospects” will likely have a long-term impact on the whole company’s cash flow and earnings prospects, Moody’s said. The ratings company currently rates GE as A2, which is five steps above junk, while Fitch has GE at A.
Downgrades could force GE to consider changes in capital allocation, including planned dividend levels, according to a recent regulatory filing by the company. GE also said cuts could hurt its liquidity by requiring it to post additional collateral on various debt and derivative instruments.
In announcing the CEO change, the Boston-based manufacturer said it would have to take a charge of about $23 billion related to its power unit. The company now expects to fall short of its previous earnings forecast of $1 to $1.07 a share.
GE Power has struggled amid a market downturn and technical issues. Last month the company disclosed that an oxidation issue with its flagship turbine model had led a key customer to temporarily shut down two U.S. power plants. The turbine division is set to be a central component of GE, alongside aviation and renewable energy, as the company sheds businesses such as health care and transportation.
GE’s plan to divest the “highly cash generative” units making medical scanners and locomotives will be among the considerations taken into account in the credit review, Moody’s said.
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