Where’s Bernie Sanders?
In October Moody’s recently downgraded GE’s debt due to Baa1 – three notches above junk status. I believe it could take several quarters to stem Power’s demise, which could lead to more downgrades. Moody’s suggested another downgrade could be forthcoming if (1) GE was unable to sustain free cash flow (“FCF”)/debt at around 7% or (2) there was not a steady improvement of debt/EBITDA towards less than 3 times. The following table outlines GE’s credit metrics based on year-to-date (“YTD”) September 30, 2018 results.
According to the Shock Exchange, GE’s credit metrics are so bad that it would warrant a Moody’s downgrade to junk immediately:
Moody’s suggested another downgrade could be forthcoming if (1) GE was unable to sustain free cash flow (“FCF”)/debt at around 7% or (2) there was not a steady improvement of debt/EBITDA towards less than 3 times. The following table outlines GE’s credit metrics based on year-to-date (“YTD”) September 30, 2018 results. According to the
To reach the 7% target, Moody’s referenced GE would have to generate full-year FCF of around $8.1 billion. Considering GE’s current portfolio of businesses, this appears improbable … The EBITDA needed to bring debt/EBITDA down to the 3x referenced by Moody’s would be about $38 billion. This is more than twice GE’s current run-rate EBITDA.
If GE does not meet Moody’s own criteria for investment grade status – and has no hope of doing so – then why hasn’t Moody’s moved on GE? Another downgrade of GE would cause GE’s bonds and stock to crater. It would cause its bond yields to spike further and likely lead to bankruptcy shortly thereafter. It would also roil the entire high yield market and cause the bonds of other highly-indebted names to crater. This potential retrocessions could lead to a wave of bankruptcies that were corporate America’s own making.
GE and corporations’ problems are self-inflicted, yet Moody’s, S&P and Fitch continue to play the role of enabler. Bernie was right about the rating agencies’ role in protecting Wall Street prior to the Financial Crisis. Now we need Bernie to call out the rating agencies again for enabling too many share buybacks, too many bad acquisitions, and too much risk after policy makers poured trillions of liquidity in the system and looked the other way.
