GE says it’s determined to run a AAA-rated business, and following this morning’s earnings report, CEO Jeff Immelt went on CNBC to make that point over and over again. But the company’s outlook has already been downgraded by S&P, and it’s obviously a weight on the stock, as evidenced by its outsized yield.
Try as he might, Immelt may not be able to keep that rating. Eric Falkenstein argues that the key with GE isn’t its leverage, but its profits. And if the world economy slows to a crawl, and it can’t make money on oil infrastructure or turbines, or jet leasing then it won’t keep its AAA:
In fact, my debt model calculations show that an exogenous increase in debt from 0 to 50% is pretty immaterial on the probability of default for a profit making company, so debt buyers are willing to facilitate such a deal. But it is the income that is key to GE’s plumb financial status, and I don’t think there is much they can do here. I would hate to see GE issue shares, because I think that would have a second order effect on its debt rating, because it won’t help if GE actually posts an income loss next year. It’s all income, not leverage, for GE, at this point, and I doubt there is much Immelt can do, top down, to affect this strategically.