Last week General Electric (GE) CEO Larry Culp confirmed an urgency to reduce GE’s $115 billion debt load through asset sales. The company also announced the sale of part of its stake in Baker Hughes (BHGE) for about $4 billion. The problem with asset sales it that GE will have to forgo future profits and cash flows. GE’s pension plan was also underfunded by about $29 billion at the end of 2017. Asset sales would also leave less profits and cash flow to cure the pension plan’s underfunded status.
GE has hundreds of thousands of current and former employees who rely on pension benefits. Who will protect them? Should the Pension Benefits Guarantee Corporation (“PBGC”) push GE to use sale proceeds from divested assets to fund pension liabilities prior to paring down debt?
Debt And Pension Obligations Are Daunting
Earlier this year GE announced a restructuring that would include merging GE Transportation with Wabtec (WAB), making Healthcare a standalone entity and retaining Aviation, Renewable Energy and Power. I assumed the move was an attempt to change the narrative and stem the free fall in GE’s share price. However, selling assets likely will not solve the demise of Power, which is being disrupted by alternative energy sources. It is unclear whether it will even improve GE’s credit metrics.
The above chart highlights GE’s credit metrics. At Q3 2018 the company had debt of $115 billion. Debt and an underfunded pension plan of $29 billion totaled $144 billion. GE’s total obligations are over 15x segment profits – this sounds foreboding. If the PBGC pushes GE to transfer divested properties with fully-funded pensions then the stock could crater. Read more:
