A General Electric facility in Ohio in 2015. Source: Barron's

In November 2018 General Electric (GE) abandoned its use of commercial paper. It followed a Moody’s debt downgrade a month earlier. I assumed it was the first signs of a run on the bank. I also assumed a spike in its funding costs could punish the earnings of GE Capital (“GECC”), the company’s financing arm. If GECC was struggling prior to a spike in funding then rising funding costs could become problematic. I assumed CEO Larry Culp would walk investors through GECC’s balance sheet and earnings, and explain the matter away. No explanation has been forthcoming. Culp may not be able to discuss any potential run on the bank, as it could raise other issues.

The Situation

GECC’s funding costs spiked after GE’s commercial paper program ended. The following chart illustrates the change in yields for selected GECC bonds at Dec. 31, 2017, Nov. 29, 2018 and June 6, 2019.

The sale of GE Biopharma to Danaher (DHR) for $21 billion was credit positive. The sale was for a reported 17x Biopharma’s EBITDA, far exceeding my estimate for GE’s debt/EBITDA of around 7x. The Biopharma deal will sharply reduce GE’s debt load, and was likely a major reason GECC’s bond yields fell from November to June. Read more:


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