New York
UJ Business
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Newly appointed General Electric CEO Larry Culp has quickly been reminded of the heavily indebted balance sheet he has taken over.
Just one day after assuming his role, S&P Global Ratings downgraded the credit ratings of GE (GE) as well as GE Capital, with Moody’s and Fitch indicating potential downgrades of their own.
All three rating agencies pointed to GE’s high levels of debt and declining cash flows, a situation worsened by significant issues within GE’s power sector. GE announced on Monday that their disappointing profits in the power division would lead the parent company to miss its 2018 financial goals.
S&P highlighted “acute near-term challenges” faced by GE Power, impacted by the industry’s transition to renewable energy. Recently, GE also revealed technical issues with its gas turbines.
As the first external CEO in the company’s history, Culp is faced with a daunting list of tasks, of which restoring GE’s once-robust balance sheet should be paramount. GE boasted a AAA credit rating as recently as 2009, but S&P has since downgraded it from “A” to “BBB+.”
Over the years, GE has accumulated significant debt due to ill-timed acquisitions, a considerable pension shortfall, and imprudent share buybacks.
Moody’s highlighted that GE’s “very high leverage” could result in substantial downgrade increments, which would increase the cost of borrowing for the firm.
On a positive note, S&P revised its outlook on GE to “stable,” anticipating improvements in leverage and cash flow in the upcoming years.
Nevertheless, GE’s debt issues may compel the corporation to reassess its $4.2 billion dividend, which had only been cut last year for the second time since the Great Depression.
In fact, the deterioration of GE’s financial health has worsened, with S&P identifying the dividend as one of several strategies Culp could employ to decrease debt.
GE stated in an official release that it maintains a “solid liquidity position,” bolstered by cash reserves and operational credit lines.
Echoing comments Culp made on Monday, GE affirmed its commitment to enhancing its balance sheet through deleveraging efforts.
With Culp now at the helm, he will need to determine whether to pursue former CEO John Flannery’s strategy of breaking up GE. Flannery’s turnaround initiative involved exiting various sectors, including oil and gas, healthcare, and the historic railroad division, using the proceeds to pay down debt.
However, reducing the size of GE will also increase its reliance on what’s left of its business portfolio, with GE Power being the largest remaining division. A decline in power profits will thus limit GE’s capability to service its debt.
