New York — General Electric (GE) may still have a relatively solid investment-grade rating, but investors aren’t taking their chances. They’re snapping up derivatives that protect against losses on the company’s debt.
The cost to insure against a default by GE climbed to as high as 211 basis points in early trading on Tuesday, 207 basis points to insure GE’s debt against default for five years, credit-default swaps prices (CDS) from Capital Market Authority (CMA) show. That’s almost double what it cost just two weeks ago, and it’s the kind of level that hasn’t been seen for the company since the waning days of the global financial crisis.
It’s still well below the peak crisis levels for GE’s finance unit back then (GE Capital’s CDS surged to more than 1,000 basis points in March 2009). But the pace of the increase has been rapid, particularly when compared with the broader investment-grade market. Yields on some of GE’s bonds have also reached levels that are in line with junk-rated bonds, Bloomberg Barclays index data shows.
CEO Larry Culp has tried to reassure investors that the company is prioritising debt reduction in its effort to combat a multiple-front crisis. Weak demand for gas turbines, high leverage and a federal accounting probe have fueled a more than 25% drop in GE’s stock price since Culp’s surprise appointment was announced October 1, extending a sell-off that has wiped out more than $200bn in market value since the end of 2016.
Representatives for Boston-based GE didn’t immediately return messages seeking comment.
‘Escalating’ concerns
In his first earnings announcement as CEO, Culp cut the quarterly dividend to just a penny a share from 12c in an effort to reduce debt. Still, credit and equity analysts remain cautious as liquidity concerns “could be escalating”, Gordon Haskett analyst John Inch wrote in a note.
Despite being cut to the lowest investment-grade tier, GE is still three notches above junk, with a Baa1 rating from Moody’s Investors Service, three steps above speculative grade, and an equivalent BBB+ from S&P Global Ratings and Fitch Ratings. All carry a stable outlook.
Yields on the company’s $1.95bn of 3.37% bonds due in 2025 have climbed to 5.6%. That’s higher than the yield on a Bloomberg Barclays index of debt rated in the highest speculative-grade tier.
Meanwhile, GE’s only actively traded perpetual preferred stock now yields more than 14%, higher than some distressed credits.
Bloomberg
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