The Importance Of GE's Credit Rating

Whoever buys this plane needs to be confident that GE will be around and solvent in 40 years to actually do the maintenance. The GE aviation business is more credit sensitive than almost any business I can think of.

And that is a problem because as Andrew Bary notes GE's debt is already trading as if the credit rating is BBB+, and if you are entering very long maintenance agreements BBB+ is simply not good enough.

If Ahmed bin Saeed Al Maktoum or Akbar Al Baker gets jittery re GE's credit rating then it will threaten GE's ability to sell engines or even Boeing's ability to sell planes (on which GE is the monopoly engine provider). 

Who are these guys you have never heard of? Well Ahmed bin Saeed is the CEO of Emirates airline and Akbar Al Baker is the CEO of Qatar airlines. These are the biggest buyers of long-haul jets in the world. They are GE's most important customers.

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GE is, I think, a rationally run business - meaning management run it to management's incentives. In the old days that was to buy stock and keep the price high (options) but now it is clearly just for business survival.

And business survival requires that GE maintain its credit rating. 

That is why there will be an equity raise.

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There are plenty who argue that GE should be broken up. I am not averse to the possibility but it is much harder than it looks. GE has lots of obligations including over 100 billion in debt and 30 billion in pension shortfalls. It also has guaranteed a few (painful) insurance obligations.

If you break up GE those obligations have to go somewhere. And debt holders or the Pension Benefit Guarantee Corporation is not going to accept them being placed against GE's troubled businesses (such as power systems). And Ahmed bin Saeed isn't going to accept them being placed against the aviation business.

So in a break-up a lot of capital needs to be raised. Probably in excess of 50 billion. 

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Disclosure: The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog ...

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