New General Electric boss Larry Culp simply bought a contemporary reminder of the debt-riddled stability sheet he’s inheriting.
Barely 24 hours after Culp turned CEO, S&P Global Ratings downgraded the credit score rankings of GE
(GE) and GE
(GE) Capital. Moody’s and Fitch warned they might do the identical.
All three rankings companies cited GE’s elevated leverage and shrinking money flows – an alarming pattern exacerbated by severe issues at GE’s energy division. GE stated on Monday that plunging revenue at GE Power will trigger the mum or dad firm to overlook targets in 2018.
S&P pointed to “deep near-term challenges” at GE Power, which has been harm by the shift in direction of renewable power. More just lately, GE disclosed mechanical issues with its gasoline generators.
Culp certainly has an extended to-do record as he begins work as the primary outsider CEO in GE’s historical past. But on the high of the record should be repairing GE’s once-sturdy stability sheet. GE had an ideal AAA credit standing as just lately as 2009. S&P lowered it on Tuesday from “A” to “BBB+”.
Over the years, GE has piled on tons of debt attributable to poorly-timed offers, an enormous pension deficit and misguided share buybacks.
Underscoring the size of the issue, Moody’s stated that GE’s “very elevated leverage” could lead on it to downgrade the corporate’s ranking by a number of notches. Ratings downgrades could make it costlier for corporations to borrow cash.
The excellent news is that S&P up to date its outlook on GE to “stable” as a result of the agency expects leverage and money circulation will enhance within the coming years.
Still, GE’s debt issues could pressure the corporate to reexamine its $4.2 billion dividend. GE reduce the dividend final yr for simply the second time because the Great Depression.
But GE’s funds have deteriorated additional. S&P listed the dividend as one among a number of levers Culp might pull to scale back debt.
In an announcement, GE stated it has a “sound liquidity position” that features money and working credit score traces.
Repeating feedback made by Culp on Monday, GE stated it stays “committed to strengthening the balance sheet including deleveraging.”
Now that he’s in cost, Culp might want to determine if he needs to go ahead with former CEO John Flannery’s plans to break-up GE. Flannery’s turnaround plan included exiting numerous companies, together with oil and gasoline, well being care and the century-old railroad division. Proceeds from the gross sales would then be used in direction of paying down debt.
But shrinking GE additionally makes the corporate extra depending on the remainder of its portfolio – with GE Power being the most important remaining enterprise. That means slumping energy revenue provides GE much less firepower to pay down debt.