Coronavirus Sinks General Electric’s Moat

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An employee unwraps turbine components inside the General Electric power plant in Veresegyhaz, Hungary.

The coronavirus has brought the U.S. economy to a practical standstill. That is not good for highly-indebted companies like General Electric (GE). The company needs the economy to keep growing to help it service its debt load of about $60 billion. The S&P recently soured on the company, revising its rating to “negative from “stable”:

The outlook for General Electric Co.’s GE, -1.68% credit rating was revised Friday to “negative” from “stable” at S&P Global Ratings, which citing greater uncertainty in the pace of deleveraging amid the negative impacts on its aviation business from the COVID-19 pandemic. That means GE’s BBB+ rating, which is three notches above “junk” territory, is at greater risk of a downgrade. “The outlook revision reflects the potential that GE may be unable to reduce debt leverage to below 3.5X in 2021, should aviation markets fail to start recovering later this year, perhaps in conjunction with a deeper-than-expected economic recession and lengthy recovery worsened by lingering social distancing dynamics,” S&P Global said.

A potential downgrade could amplify GE’s borrowing costs and make it difficult to raise more capital. The Federal Reserve has been providing liquidity to the bond markets to ensure credit continues to flow to corporations. Debt may not be cheap, especially when you have to repay it after the economy has peaked. GE returned to the trough this week, launching a strategic debt issuance to fund a tender of GE bonds due 2024. Management is buying more time by pushing out debt maturities. Read more:

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