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Archive for the ‘General Electric – GE’ Category

BBB Corporate Bonds – How Many Are Close to Default?

In 2008, in the aftermath of the financial crisis, the Federal Reserve began its “quantitative easing” program, a determined effort to lift the economy by lowering the cost of borrowing. It bought up trillions of dollars in Treasury and other debt securities, effectively reducing long-term interest rates. Debt issuance exploded. In the last decade, the amount of corporate bonds outstanding almost doubled to $9 trillion, from $5.5 trillion.

Much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum — meaning that the money borrowed remains at some danger of not being paid back. There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, almost three times the amount that existed in 2008 and making up an ever increasing portion of the investment grade bond market at almost half of its overall size bond market.

The changing composition of the bond universe introduces extra risks for investors tracking the broad market. Lower-rated bonds tend to fall more sharply if sentiment deteriorates, and are more likely to default or be downgraded to junk, which can prompt some forced selling.

General Electric Co. (GE) is an example of a high-profile company with a lower investment-grade rating that has struggled. Yields on GE bonds due in 2025 have moved to 6.4% from below 3%.  What happens in the corporate bond market has wider implications, since rising credit spreads can feed through to the rest of the economy.

Market Sees Problems Ahead for General Electric – GE

General Electric Co. shares plummeted after two Wall Street analysts sounded more alarm bells around the company’s liquidity, and a report said former General Electric employees were being questioned by federal investigators about its troubled insurance business.

Deutsche Bank slashed its GE price target to $7 a share on Friday, saying revenue for the conglomerate’s struggling power business “remains flattish but does not continue to decline.”

“We think the key debates can be boiled down to the trajectory of GE Industrial [free cash flow] and whether the company is headed for a liquidity crisis,” Deutsche Bank analyst Nicole DeBlase said in a note to investors. The firm’s base case assumes “an economic downturn does not happen” through the end of 2021, DeBlase said.

Even in Deutsche Bank’s bear case, DeBlase said the firm does “not forsee a liquidity crisis.”

The other blow came as the Wall Street Journal reported that several former General Electric employees have said the company’s insurance business failed to internally acknowledge worsening results over the years. The employees also said that they were interviewed by government lawyers.

Shares were down 5.8 percent at 9:54 a.m. in New York, after dropping as much as 6.4 percent earlier in the session. The stock has remained below $8.00 per share over the past two weeks, a level it last saw in March 2009 at the financial crisis market bottom.

General Electric’s 4.418% notes due in 2035, issued out of the GE Capital entity, also fell this morning and now trade at a spread of about 286 basis points above Treasuries, 12 basis points wider than where the bonds closed yesterday. The notes are the most active in the investment-grade bond market today.

GE’S Free Fall May Be A Sign of a Broad Corporate Debt Problem

Over the past decade, the Fed has kept interest rates at historically low levels.  These low interest rates have incentivized U.S. Companies to borrow, adding significant debt to their balance sheets.  As reported by the Wall Street Journal, the gap between investment-grade U.S. corporate bonds and U.S. Treasuries has reached its highest level in two years.  Similarly, the spread between junk-rated bonds and U.S. Treasuries have hit a 19 month high.

Meantime, General Electric Co. (GE), once considered the bluest of blue chip stocks with an immaculate credit history, may now be the poster-child for over-borrowing.  The stock, which traded at roughly $30 per share two years ago, is now under $8 per share.  Its bonds are approaching junk territory, with S&P downgrading its debt in October from A to BBB+.  If GE debt falls to junk levels, it would make up one-tenth of $1.2 trillion bond market according to data from Fitch Ratings.

GE’s free fall has led market experts to eye other companies with significant debt that may be exposed problems similar to those GE faces.  Indeed, if GE’s debt issues are indicative of a broader corporate over-borrowing problem, it could spell trouble for the economy moving forward.

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