The Importance Of GE's Credit Rating

Bluntly I do not think a break-up is realistic. You could get away with under half the raise if you don't break it up. And maybe you could just sell some businesses to strengthen the balance sheet and get away without a raise.

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Rolls Royce went through this. There was a period where Rolls was problematic - and if you looked at the balance sheet you would have immediately rated it A+. But even then A+ was barely enough - even the threat of a downgrade and Rolls would have had to raise capital to protect their business.

Rolls never raised equity - but it was touch-and-go. 

GE is far more problematic than Rolls at the nadir - simply because there are far more obligations on GE's balance sheet.

I reckon an equity raise is likely. I don't know why they didn't cut the dividend in its entirety (except maybe that wasn't enough). It may be that 20 billion in asset sales is enough - but I have my doubts. I think they will need more to keep the customers satisfied. 

Ahmed bin Saeed Al Maktoum, this one is up to you.

John

POST SCRIPT: I have been asked several times how GE got into this trouble. Here is my very quick summary.

a). GE was left hyped up and overly dependent on finance income and accounting tricks under Welch (who I think is the main culprit here),

b). Immelt did not defuse all the unexploded Wendt bombs anything like fast enough. GE would have gone bust on the Welch trajectory, and Immelt got it off the Wendt trajectory, but not far enough off the Wendt trajectory, and

c). Both Wendt and Immelt behaved as if their body odour was perfume. They believed their own hype and bought back stock and stock and more stock. Total shares repurchased were over 100 billion dollars. Just 30 billion of that money now would solve the credit rating problems.

d). Power systems which was once perhaps the golden business fell on hard times. Solar is now cheaper than coal or gas. Renewables are cheap. This is a problem if you are the biggest capital equipment sellers to the old tech. This was exacerbated by spending 10 billion on Alstom just as it all fell apart. Immelt doubled down on dying technology.

The 20 year accounts are here.

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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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