Nov 18, 2018

General Electric's massive value deflation

General Electric's stock closed Friday at just $8.02 per share, which is down 75% from the July high of $33, down 80% from the pre-crisis high of $42, and down 85% from the all-time high of $60, set in August 2000.

Data:FactSet. Chart: Lazaro Gamio/Axios

The big picture: Those numbers, if anything, understate the degree to which GE has been diminished since its heyday.

  • In 2008, GE's enterprise value — the most comprehensive measure of the value of the company — was more than $880 billion. The financial crisis wiped about $300 billion from that figure, but the recent drop has been larger still.
  • In the past three years, GE's enterprise value has fallen by 66%, or $365 billion, to $175 billion.

No one's shedding any tears for speculators like Nelson Peltz, who has lost some $700 million on his GE bet. But GE bondholders are a different matter. GE has a total debt of $115 billion, including $100 billion of long-term bonds. That's more than its market capitalization.

  • The once unthinkable — a GE default — is now very thinkable. The company, which had a triple-A credit rating as recently as 2015, is already trading at junk levels.
  • In a sign of how desperate GE is for cash, it announced this week that it's selling Baker Hughes, its oilfield services unit. That's not the kind of thing that a healthy company would do while U.S. oil prices are on a record losing streak.

To see just how bad things are looking for GE, consider its perpetual preferred securities. If GE doesn't buy back that paper at par in January 2021, it's going to have to pay a punitive 333 basis points over Libor in interest. And it's looking very much as though GE won't have the wherewithal to buy back the stock.

  • If GE were in better shape, that would be good news for the price of the securities. All else being equal, bonds with higher coupons are more expensive. Instead, the price has plunged to less than 85 cents on the dollar.
  • What explains the low price? The risk that far from paying 333bp over Libor, GE will pay nothing at all. The company has the option to do that — if it stops paying a dividend on its common shares.

The bottom line: GE Capital needs at least $20 billion in new funds, and perhaps significantly more, according to a research note put out by Goldman Sachs this week. Goldman also raised questions about GE's insurance and power operations.

Why it matters: GE is far from insolvent, but it's definitely in trouble. If its $100 billion of debt got downgraded to junk status, the effect on the credit markets could be seismic.

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