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Moody's Mulls GE Downgrade

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Tuesday, 02 October 2018 10:19 AM

General Electric Co.’s credit rating is at risk of a significant downgrade as the beleaguered manufacturer grapples with a deepening slump in its power-equipment business.

Moody’s Investors Service placed GE and its finance arm on review for downgrades that “may not be limited to one notch,” according to a statement Tuesday by the ratings company. Fitch on Monday put GE, which still has a significant financial business including a major aircraft lessor, on watch negative.

The “dimmer prospects” for GE’s gas-turbine unit 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.

The prospect of a ratings cut -- and the higher borrowing costs that come with it -- adds to the challenges awaiting 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 the power slump, flagging cash flow, a deteriorating insurance portfolio and investigations by the U.S. Securities and Exchange Commission.

GE didn’t immediately comment.

A downgrade 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 a cut could also hurt its liquidity by requiring it to post additional collateral on various debt and derivative instruments.

GE’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 (GE) were little changed at $12.09 at 11:35 a.m. in New York, following Monday’s 7.1 percent rally that followed Culp’s appointment.

In announcing the CEO change, the Boston-based manufacturer also 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.

The Moody’s credit review marked the latest setback for GE Power, which last month 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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Credit ratings agency Moody's Investor Service said on Tuesday it has placed ratings of General Electric Co. and its finance unit under review for a downgrade, a day after the conglomerate replaced its chief executive officer.
moodys, ge, ratings, review, downgrade
Tuesday, 02 October 2018 10:19 AM
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