Tags: ge | downgrade | costs | debt | market

GE Downgrade Will Lift Its Costs in a Debt Market It Once Ruled

General Electric and GE logo in silver letters on a red brick wall side
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Wednesday, 03 October 2018 08:09 AM

General Electric Co. may have to pay a little more the next time it wants to make payroll.

The manufacturing giant lost the near-top credit ratings on its short-term debt on Tuesday. That downgrade will likely force the company to pay more to borrow in at least one credit market, namely the market for bonds known as commercial paper.

GE relies on that market to help fund its daily operations, and it used to be one of the biggest issuers of the securities. The manufacturer had on average around $16.6 billion of commercial paper outstanding during the second quarter. At the end of June, it had about $115.6 billion of total debt, of which about $6 billion was commercial paper, according to company filings.

Any increase in GE’s borrowing costs adds more pressure to a company that is already suffering. It’s facing sluggish demand for its gas turbines, flagging cash flow, and probes from the U.S. Securities and Exchange Commission. This week it replaced its chief executive officer with Larry Culp, the first ever outsider to head the company.

A GE spokeswoman was not immediately available for comment about commercial paper. But in reference to credit downgrades broadly, she said “GE has a sound liquidity position, including cash and operating credit lines.” The company remains committed to strengthening its balance sheet, including reducing debt levels, she added.

S&P Global Ratings cut GE’s short-term grade to A-2, a level below the top tier. That’s a rating of commercial paper that some classic prime money market funds are reluctant to buy. Moody’s Investors Service has GE at P-1, or equivalent to one step higher than S&P, and said on Tuesday it may also cut the company’s short-term ratings. With fewer funds interested in buying, the company will have to pay higher rates to sell its commercial paper, said Peter Crane, president of Crane Data, which tracks money market funds.

“They’ll still be able to find buyers, but at a cost of course,' Crane said. On Monday, it cost 2.25 percent for a top-rated corporation to borrow for 90 days, according to U.S. Federal Reserve data. A2-rated companies paid 2.56 percent.

One bright spot for GE: it’s spent the last decade cutting its reliance on commercial paper. In 2008, the company had more than $100 billion of the debt outstanding, making it one of the biggest issuers. But during the financial crisis, GE found its access to that market severely constrained, and vowed to change its liabilities. It turned to alternatives including longer-term corporate bonds and bank borrowing.

As GE has cut its reliance on commercial paper, the market has more broadly shrunk. In 2016, regulatory changes forced some prime money market funds to pass losses onto investors when short-term company debt lost value. That made funds that invest in only government securities more popular among some investors, sending assets in prime funds plunging.

“Money fund managers have primarily focused on bank commercial paper and only the highest, highest quality corporate paper,' said Tony Carfang, a Chicago-based managing director at Treasury Strategies, a division of Novantas. “GE has been squeezed out.'

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General Electric Co. may have to pay a little more the next time it wants to make payroll.The manufacturing giant lost the near-top credit ratings on its short-term debt on Tuesday.
ge, downgrade, costs, debt, market
Wednesday, 03 October 2018 08:09 AM
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