GE’s tumbling bonds are highlighting a bigger problem at the fallen giant

  • GE, once the world’s most valuable company, is now struggling to survive.
  • The company’s bonds are falling even after GE said it would sell its stake in oil field company Baker Hughes.
  • The company’s leverage is high, causing a “sense of urgency.”

Once the world’s most valuable company, GE’s fall from grace has been stark. Investor confidence has been shaken and the company’s bonds are taking a hit.

Trading on November 13 saw the company’s 4.4% 2035 bond fall 2.5% on the back of news that the company was selling a portion of its stake in Baker Hughes, an oil field servicing company. This decline came even as GE shares rose following the announcement.

This contrast with the company’s shares is important as the company’s future borrowing cost is linked to its bond yield. GE’s bond yields have been on the up of late with an issuance by GE Capital, due January 2020, increasing its yield to 4.6% – up from 3.3% in August, according to the Wall Street Journal.

GE is planning on raising $US4 billion in cash from the Baker Hughes sale and doesn’t expect to return to bond markets anytime soon. But, the company’s future borrowing cost has been pushed higher, reflecting investor fears about GE’s shrinking cash pile. Some of GE’s bond issues are now at yields which would be more common in junk bond markets, suggesting the market is pricing in the possibility of a credit downgrade.

According to a note from Bank of America: “Over the past month, as GE was gradually downgraded to BBB1, its outstanding bonds have now repriced not only to BBB levels, but to BB-rated levels in high yield.” For example, yields on the company’s $US1.95 billion of 3.37% bonds due in 2025 have climbed above 5.6%, according to Bloomberg.

GE’s new CEO Larry Culp, who was appointed to the role in October following the surprise ouster of John Flannery, told CNBC on Monday that the company was committed to reducing its leverage and stressed a “sense of urgency” about the company’s debts. GE’s market value has decreased by more than $US200 billion since the end of 2016.

The cost of insuring against a default on GE debt has now tripled in the past two months, according to credit default swap data from MarketAxess.

GE used to be a star of corporate America known for its management prowess and business acumen but the company has had three different CEOs since July 2017 while its stock has fallen 80% since 2000.