Fitch Downgrades GE to BBB+, with a stable outlook

Fitch Downgrades GE to BBB+, with a stable outlook
November 5, 2018

 

Fitch Ratings downwardly revised General Electric (NYSE: GE) and GE Capital’s rating on Friday to BBB+, with a stable outlook, from the earlier ‘A’ rating. The downgrade follows comparable decisions by S&P Global Ratings on October the 2nd and Moody’s Investors Service last Wednesday. Subsequent to the announcement, for the eighth successive day, GE’s stock fell 3.03% to close at $9.29, the lowest since March 11, 2009.

 

GE’s power division drains cash flow

Fitch Ratings are merely three steps higher than junk status. Fitch, a division of Hearst and Times Union publisher, highlighted shaky results and a disappointing forecast for the downgrade of Schenectady-based GE Power. Last Tuesday, GE posted the third-quarter loss of $22.8 billion loss on revenues of $29.5 billion. A significant portion of the decline was due to a write-down of $22 billion in the form of goodwill impairment charge, with a massive chunk of it from its distressed 2015 acquisition of French energy giant Alstom.

GE Power has never recovered since the buyout transpired. The GE Power division swung to a 3Q18 loss of $631 million, compared to a profit of $464 million in the year-ago period. During the quarter, orders declined 18% on a y-o-y basis to $6.6 billion while revenues fell 33% to $5.7 billion.

Commenting on the results, Fitch analysts said: “Declining revenue and profitability at the Power business is the largest contributor to GE’s declining margin and (free cash flow) performance.”

Fitch cited price pressure on renewable energy, difficulties in oxidizing some gas turbine blades, pension commitments, weak industrial needs and overcapacity as reasons for the downgrade.

Regarding the downgrade, a GE spokesman said “GE has a sound liquidity position, including cash and operating credit lines. The downgrade is manageable, and we are prepared for it. We remain committed to strengthening the balance sheet including deleveraging.”

Fitch explained the downgrade as follows: “The downgrade of GE’s ratings reflects a deterioration at GE Power, which could see weak results for an extended period before restructuring becomes fully effective, an associated decline in [free cash flow] from already-low levels and Fitch’s expectation that leverage at the industrial business will improve more slowly than originally anticipated.”

Notably, as mentioned earlier in this article, Moody’s downgraded GE citing the harm created to the industrial giant’s cash-flow projection by the worsening of its power unit. Moody’s Investors trimmed the industrial conglomerate’s credit rating by two steps to only three levels above “junk” status. While the long-term rating was downgraded to Baa1 from A2, the short-term rating was cut to P-2 from P-1. The rating outlook was altered to stable. Moody’s have also pointed out that GE will not achieve its 2018 cash-flow goal. Even to attain analysts’ lowered forecasts, it will require a sharp improvement in the fourth quarter, and that appears doubtful to materialize.

GE’s Ebitda and liability metrics have disintegrated, and it has become clear they won’t manage the level suitable for its previous credit ratings for some time. Moody’s downgrade comes approximately a month after S&P Global Ratings slashed GE’s credit rating by two levels to BBB+, which is also three levels above junk, from the prior ‘A’ rating. Moody’s downgrade comes a day after GE posted Q3 earnings that missed forecasts, and said it anticipates 2018 free cash flow and adjusted earnings per share to “significantly miss” its goals. Moody’s explicitly called out a blade oxidation problem with GE’s leading H-class gas turbines as a possible risk.  An incapability to resolve the issue could result in another downgrade, Moody’s cautioned.

Following the downgrade, GE’s 5% perpetual bond declined 1.13 cents to 92.13 cents on the dollar. More importantly, GE suffered its worst setback in the commercial paper market, with Moody’s lowering its GE’s short-term debt rating to P-2 from P-1. On average, GE borrowed almost $10 billion through the commercial paper market in the third quarter.

While reporting the weak 3Q18 results, GE also slashed its quarterly dividend to a penny per share, mainly to minimize the level of quarterly borrowing.

Despite GE’s shrinking profits, debt remains high. GE and GE Capital’s total debt at the end of the third quarter was $115 billion, down from $126 billion at the end of 2017. The creamy layer of the commercial paper market can be accessed open by firms with a strong balance sheet and GE no longer qualifies.

The dividend cut announced last week will save roughly $4 billion a year for GE. The company also plans to raise about $20 billion by divesting several companies, including the health subsidiary and the majority ownership in Baker Hughes – the oil and gas company. Fortunately, GE has $40 billion worth credit lines which can be used to fund the operations.

In an SEC filing, GE cautioned that another round of downgrades could increase borrowing costs and negatively impact access to capital markets.  Therefore, fundamentally, we can expect the stock to remain bearish in the short-term.

Technically, the stock has broken its 50-day moving average. Furthermore, the MACD indicator is still in the bearish zone. As a result, we can expect the stock to remain bearish in the short-term.

ge - technical analysis - 5th November 2018

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Richard W

Richard W

Richard is the guy who know everything there is about the financial industry, working in a top firm for over 15 years, he will give the lowdown on some of the biggest companies in the world


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