Larry Culp, the new CEO of General Electric, has quickly become aware of the heavily indebted balance sheet he’s taking over.
Just one day after stepping into the CEO role, S&P Global Ratings downgraded the credit ratings of both GE (GE) and GE Capital, with Moody’s and Fitch indicating they might follow suit.
All three rating agencies pointed to GE’s high leverage and declining cash flows, a concerning trend further worsened by significant issues within GE’s power division. On Monday, GE reported that a significant drop in profit at GE Power would lead the company to miss its financial targets for 2018.
S&P highlighted the “serious near-term challenges” at GE Power, which has been adversely affected by the shift toward renewable energy. Recently, GE also revealed mechanical issues with its gas turbines.
As the first external CEO in GE’s history, Culp certainly faces a substantial agenda. However, the foremost priority must be to mend GE’s once-strong balance sheet. Not long ago, in 2009, GE held a perfect AAA credit rating, which S&P has now downgraded from “A” to “BBB+”.
Over the years, GE has accumulated significant debt as a result of ill-timed acquisitions, a substantial pension shortfall, and misguided stock buybacks.
Emphasizing the seriousness of the situation, Moody’s noted that GE’s “considerably elevated leverage” could lead to a more significant downgrade of the company’s rating. Downgrades in ratings can increase borrowing costs for companies.
On a positive note, S&P has revised GE’s outlook to “stable,” suggesting improvements in leverage and cash flow over the coming years.
Nevertheless, GE’s debt challenges may compel the company to reassess its $4.2 billion dividend. Notably, GE reduced its dividend last year for only the second time since the Great Depression.
Further complicating matters, GE’s financial situation has worsened, prompting S&P to highlight the dividend as one of several options Culp might consider to reduce debt.
In a public statement, GE has assured that it maintains a “solid liquidity position” supported by cash reserves and operational credit lines.
Echoing Culp’s earlier remarks, GE reaffirmed its commitment to enhancing the balance sheet and pursuing deleveraging efforts.
As Culp takes the reins, he faces a critical decision about whether to continue with the prior CEO John Flannery’s vision for potentially breaking up GE. Flannery had proposed a turnaround strategy that involved exiting various segments, including oil and gas, healthcare, and the long-standing railroad division, with proceeds from these sales directed toward reducing debt.
However, scaling back GE would increase its reliance on the remainder of its portfolio—particularly GE Power, which remains its largest business. This dependency means that a decrease in profits from the power division could limit GE’s capacity to reduce its debt load.
Larry Culp, the new CEO of General Electric (GE), faces significant challenges upon taking office, particularly concerning the company’s heavily indebted balance sheet. Just a day after Culp assumed his role, S&P Global Ratings downgraded GE and GE Capital’s credit ratings, citing high leverage and decreasing cash flows. Moody’s and Fitch have also indicated they may consider downgrades, emphasizing the critical state of GE’s finances.
The downgrade highlights serious difficulties in GE’s power division, which has been struggling due to an industry shift toward renewable energy and recently disclosed mechanical issues with its gas turbines. GE announced that plummeting profits in its Power segment would lead the company to miss its 2018 financial targets. S&P has noted the “deep near-term challenges” GE Power is facing, which are crucial for the company’s overall performance.
Culp, the first outsider CEO in GE’s history, has inherited a complicated situation. The company’s credit rating, once as high as AAA in 2009, has recently fallen from “A” to “BBB+”, reflecting the accumulation of debt stemming from ill-timed acquisitions, a significant pension deficit, and poorly planned share buybacks. Moody’s noted GE’s “very elevated leverage”, warning that it could downgrade the company’s credit rating by multiple levels, which would increase borrowing costs for the corporation.
Amid these challenges, S&P revised its outlook on GE to “stable,” anticipating that leverage and cash flows might improve in the coming years. However, GE’s ongoing debt situation will likely prompt a reconsideration of its $4.2 billion dividend. The company had previously cut its dividend last year—the second such reduction since the Great Depression—indicating the severity of financial issues. S&P suggested that adjusting the dividend is one of several options Culp could leverage to mitigate debt levels.
In a public statement, GE has expressed confidence in its “sound liquidity position,” indicating that it has sufficient cash and access to operating credit lines. GE reiterated its commitment to strengthening its balance sheet and pursuing deleveraging strategies—removing excess debt from its financial structures.
As Culp embarks on reforming the company, he must evaluate former CEO John Flannery’s restructuring proposals, which included breaking up GE into smaller entities. Flannery’s plan intended to divest various segments, such as oil and gas, health care, and a century-old railroad division, using the proceeds to reduce debt levels. However, the downside of this approach is that it makes GE more reliant on the profitability of its remaining segments, primarily GE Power. Weakness in the power division could hinder the company’s ability to pay down its immense debt.
Culp’s tenure at GE began under a cloud of uncertainty and high expectations. To restore GE’s financial health, he must tackle the intricacies of its balance sheet while simultaneously navigating operational issues within its core businesses. His decisions in the coming months will be critical in defining not only the company’s immediate future but also its long-term viability in an increasingly competitive and evolving market landscape. The path forward requires careful consideration of asset sales, dividend management, and operational improvements to bolster cash flows and stabilize leverage ratios, making it a daunting task for the newly appointed CEO.
