Spotlight: General Electric (GE) *contact for updated tearsheet*
On December 18, S&P cut the outlook for GE to negative and gave the company a 1-in-3 chance of losing its top grade within two years. This announcement came one day after GE’s investor presentation, which suggested that the company’s AAA credit rating could be sacrificed in the name of the dividend.
This does not mean that GE has completely given up on maintaining its top rating. GE plans to shrink GE Capital from 50 percent to 40 percent of total profit. Even more, the company plans to issue $45 billion in long-term debt in 2009, less than the $66 billion it has maturing, and to reduce commercial paper to $50 billion, less than the $75 billion they had planned before.
Bloomberg ran this article today, which showed that the gap between bonds rated AAA and those three steps lower, at AA-, averaged a record 1.12 percent in December as the credit crunch deepened. Before credit markets began unraveling 16 months ago, the difference averaged about 0.06 percent. Insert GE as an example, and an extra percentage point in interest would have cost the company $233 million more in annual payments on the $23.3 billion they raised in the bond market in the first half of 2008.
Despite the increased borrowing costs, shareholders should be pleased with GE giving priority to the dividend and future earnings growth instead of their credit rating. If GE decided to do the opposite, they would be forced to focus on raising capital by selling business units or forgoing opportunities that would benefit the company in the long term.
The financial crisis has called into question the balance sheets of even the most creditworthy institutions. Consequently, GE’s valuations are at multi-decade lows.
With a recent capital infusion as well as government loan and guarantee programs, GE Capital’s funding position appears stable. In addition, strong cash flows are expected from GE’s industrial businesses, enabling the company to maintain its current dividend through the end of 2009.
Quick Hits
- The Financial Crisis Timeline
- GMAC Adds Loans as U.S. Injects $6 Billion to Aid GM
- Billionaire Blowups of 2008
Peter Lazaroff, Junior Analyst
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