New York
CNN Business
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General Electric’s new boss Larry Culp just got a fresh reminder that the balance sheet he inherited is loaded with debt.
Less than 24 hours after Culp took over as CEO, S&P Global Ratings downgraded the credit ratings of General Electric (GE) and GE Capital. Moody’s and Fitch warned they might do the same.
All three major ratings firms cited GE’s rising leverage and shrinking cash flow — worrisome trends exacerbated by serious problems at GE’s power unit. GE said on Monday that a sharp drop in profits at GE Power would prevent the parent company from meeting its 2018 targets.
S&P pointed to “significant near-term challenges” at GE Power, which has been hurt by its shift to renewable energy. Recently, General Electric disclosed mechanical problems with its gas turbines.
As the first outside CEO in GE’s history, Culp certainly had a long to-do list when he entered the job. But the first priority must be repairing GE’s once-robust balance sheet. As recently as 2009, GE had a perfect AAA credit rating. S&P downgraded it to “BBB+” from “A” on Tuesday.
Over the years, GE accumulated a mountain of debt due to ill-timed deals, huge pension deficits and misleading stock buybacks.
Moody’s highlighted the seriousness of the problem, saying GE’s “very high leverage” could lead to a multiple-notch downgrade of the company’s rating. A downgrade could make borrowing more expensive for the company.
The good news is that S&P updated GE’s outlook to “stable” as the company expects leverage and cash flow to improve in the coming years.
Still, GE’s debt problems may force the company to review its $4.2 billion dividend. GE cut its dividend last year for the second time since the Great Recession.
But GE’s financial situation deteriorated further. S&P lists the dividend as one of several levers Culp can use to reduce debt.
GE said in a statement that it has a “strong liquidity position,” including cash and operating credit lines.
GE reiterated Culp’s comments on Monday, saying it remained “committed to strengthening its balance sheet, including deleveraging.”
Now that Culp is in charge, he will need to decide whether to proceed with former CEO John Flannery’s plan to break up GE. Flannery’s turnaround plan includes exiting a variety of businesses, including oil and gas, health care and the century-old railroad unit. Proceeds from the sale will be used to pay down debt.
But GE’s shrinkage also makes the company more reliant on the rest of its portfolio – with GE Power being the largest remaining business. This means that falling power profits have weakened GE’s ability to repay its debt.