It's Time for GE to Lose Its Triple-A 15 comments
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GE's triple-A credit rating is so important, especially now that it has been threatened by S&P, that it has overshadowed the company's earnings this morning. But really it's high time that GE (GE) lost the rating, which is a throwback to the pre-crisis era. Why?
- The slogan is familiar by now: Any company reliant on its triple-A rating shouldn't have one. GE should by rights be a large industrial company, but over the years, thanks to that rating, GE Capital -- essentially an in-house SIV -- became a monster which grew to a point where it drives the company's earnings and success. It became so big, in fact, that it needed its very own Fed bailout. This is not healthy.
- Triple-A means risk-free, and GE isn't that, as one look at its spreads will indicate: Five-year GE bonds are trading at 326bp over Treasuries, which, as Eric Falkenstein says, is "a spread that most junk bonds had in 2006". And if we've learned one thing over the course of this crisis, it's that when a triple-A company sees spreads at that kind of level, it won't keep that rating for long.
- If it wasn't for the Fed stepping in to save the day, GE would have had a massive liquidity crunch already, simply incapable of rolling over its whopping $515 billion in liabilities. In other words, a large part of the triple-A is simply the moral hazard of GE being too big to fail -- and since that's the case, the government should by rights be getting paid for its de facto backstop. Instead, the shareholders are receiving $13.4 billion a year.
- GE's creditors can no longer take solace in the fact that if push came to shove, GE could borrow against its assets in order to pay them off when their debts come due. GE's unsecured debt is trading at high spreads, but there's no indication that GE's secured borrowing costs are any lower. After all, who has a long-term cost of funds low enough to make money lending to GE at low secured rates?
- Since it's not a bank, GE has made zero efforts to mark those assets to market. There's no doubt they've fallen a lot in value, but your guess is as good as mine when it comes to how much they've fallen in value. It's probably not enough -- yet -- to wipe out GE's equity, but it might well be enough to make that equity cushion so thin that a triple-A rating is no longer warranted.
The fact that GE reckons it can still pay a $13 billion dividend and be profitable is indication that it's a relatively safe company, at least unless or until investors start trying to mark its assets to market. Now it's not clear why they should do that, since those assets were always being held to maturity, and there's no reason why GE should ever want to sell them off. But on the other hand, there's also no reason why shareholders should consider those assets to really be worth par -- which is what GE is reporting.
In any case, no company with half a trillion dollars of liabilities can sensibly have a triple-A rating in this market: GE is simply too leveraged to justify such a thing. Which is maybe why, at $12.55 a share, the stock is at its lowest level since 1996.
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Comparing current spread to T bonds vs. what junk bonds were trading like in 2006 is a terrible argument to make
Additionally, I recall earlier this decade GE bonds were trading like they were going to be downgraded and they weren't
For GE to come to market with new bonds, investors would demand A-AA rates (based on current pricing). In essence, regardless what S&P or Moody's do, GE has been already been "downgraded" by investors
if GE has over US$ 500 billions in liabilities,how the latter is not suffocating by borrowing cost ? (I don't know what kind of loans it owe,bonds or diversified loans...)
and furthermore,paying over US$ 13 billions dividends...
I wish I'd gotten my comment in before you.
The rating agencies should go hang out with the dinosaurs in the museum of extinct animals.
While they were rating risky MBSs AAA, they were rating many GO municipal bonds at close to junk levels. Since the default rate on GO debt is negligible, and the loss rate even lower, what good are the ratings? And why does any care any more?
But with GE -- I don't have a position, but I see it as the lesser of two evils, but both are really evil... Does this make sense?
Lose the rating and borrowing is more costly -- mess with the dividend and people sell you out on the big board and you lose cap that way.
Maybe I missed the question...? I'm just taking a stab at it and perhaps someone with a position in GE will have more insight for you.
PS: Since you are 19 years old... The Chinese have a proverb: May you live in interesting times. You, my friend, will be living in interesting times.
On Jan 23 12:49 PM 19 years old (future)investor wrote:
> Hello,I have a question:
>
> if GE has over US$ 500 billions in liabilities,how the latter is
> not suffocating by borrowing cost ? (I don't know what kind of loans
> it owe,bonds or diversified loans...)
>
> and furthermore,paying over US$ 13 billions dividends...
Orange County, CA was AAA when it filed bankruptcy. Enron was listed as investment grade when it collapsed. All this ABS, CDO, SIV debt was supposedly AAA. The opinion of useless credit rating agencies should not even be considered by any intelligent investor
As for GE's actual credit worthiness, it should be remembered that many years ago Bill Gross of Pimco complained about GE's over reliance on the commercial paper market. I am not sure he was the first person to point out GE's weak finances -- I only highlight him because he is/was well known and his opinions well read (whether or not you agree with him, everyone at least knows his thoughts).
GE hasn't been an industrial company in decades -- dozens of analysts have pointed out the dominance of GE Capital in GE's results. GE has long made more money financing aircraft engines and medical equipment than it did selling them.
Besides GE Capital, the biggest earnings driver during Jack Welch's time was mergers and acquisition! When Welch started in the early 1980s, there were lots of poorly run conglomerates (GE was one of them) that needed to be split up -- M&A made sense. But toward the end of Welch's reign, GE was straining to find an M&A deal that was profitable and yet big enough to impact a company of GE's size...
Imelt's two competitors for the CEO position went on to devastate the business models of Home Depot and 3M. And the former GE Capital chief Gary Wendt was unable to turn around Conseco. So much for GE's heralded manager development process.
Imelt himself "won" the CEO position after running GE's aircraft and medical divisions -- which, however well run, were side shows compared to the financing and M&A activities
GE is a heavily leveraged bank, in a difficult banking environment, being run by a guy who climbed the ranks running manufacturing businesses
That is what investors should consider -- not the un-informed opinion of credit rating agencies
Absolutely right! The rating agencies are a joke and ought to go out of business. But they won't because they are supported by companies (like GE) who buy their ratings.
Putting GE on creditwatch for a "possible downgrade in two years" is an absolute joke! In two years either GE will be bankrupt or will be past it's problems. Obviously the rating agencies and totally phony.
Keep dividends steady. It is steady and constant way to keep us family investors to add on regular basis.
Do not abandon the GE Money Bank concept in Philippines and other Asian nations. Cut out the bad boy image and poor credit card businesses. But, the GE Money Bank is gaining reputation in poor nations as place to: A) Learn how to have a checking ATM accont.
B) How to save. C) That GE - a USA company is SAFE and will treat the customer fair and good.
Its working overseas. We can cut salaries in CT at headquarters. Nobody needs more than $200,000 regardless of what they do. Who needs more than that to live on? So Cut salaries and the ones who do not want to build the company in the old ways. Fire them .
This applies to the board and GE regualrs too. NO Base pay over $200,000 period. Let them buy GE stock if they want dividends. lol
GE will survive the mess and pay its liabilities as expected. Giving it AA or A or BBB will just increase the panic on the market, raise its financing costs so promote job loss since they will reduce work force more than expected and they will survive anyways. It was time to downgrade MBS in 2004-2005-2006-2007 to C or less, now it is no longer time to downgrade viable companies since it will just add to your nation woes.