General Electric Co.’s credit rating, the best among U.S. industrial companies, is at risk as the manufacturing giant weighs adding debt to support its expansion.
A proposal to borrow as much as $20 billion would likely reduce GE’s AA+ rating from Standard & Poor’s, said Joel Levington, an analyst with Bloomberg Intelligence. While the move could hurt bondholders, it will boost GE’s ability to make acquisitions and repurchase shares, he said.
“More and more companies are finding less strategic value in having really high ratings,” Levington said. “Rates are low and you’re in this environment of very little growth. When you can’t get a tremendous amount of growth, this is the way to supplement your growth.”
Chief Executive Officer Jeffrey Immelt revealed GE’s borrowing plans at an industry conference Wednesday, saying it may be necessary to bring the company’s balance sheet in line with its industrial competitors. As GE exits most of its finance operations, Immelt questioned whether maintaining the double-A credit rating would “really make sense for us.”
GE considering adding to its balance sheet reflects a pattern among U.S. manufacturers deciding that a top rating isn’t necessary, Levington said. He pointed to 3M Co., the maker of Post-it notes and Scotch tape, which said it plans to increase borrowing and lower its cost of capital, prompting Moody’s to downgrade the company in February.
GE, which is shedding the bulk of its finance unit in favor of industrial operations, may no longer need such a high rating, he said. The Fairfield, Connecticut-based company announced plans last month to sell most of the commercial and consumer lending units of GE Capital.
“GE has historically had a very, very high credit rating. They’ve always needed it,” Levington said. This week, “they said we want to look more like our peers. Their peers tend to have ratings that are pretty much in the single-A category, which is about three notches lower at the S&P than where they’re rated.”
GE is one of just 33 U.S. or European companies rated double-A or better, according to data compiled by Bloomberg. The company, which has been in the double- or triple-A range for 41 years, has the highest rating in the Standard & Poor’s 500 Industrials Index.
GE could add as much as $32 billion in debt capacity and maintain a single-A rating, Levington said.
The finance-disposal plan, expansion of GE’s industrial businesses and exposure to the oil and gas market present a variety of challenges, heightening the company’s financial risk, Moody’s Investors Services said Thursday.
Combined with its leverage ratio and cash flow-based performance metrics, GE’s “credit profile has notably weakened of late,” Moody’s Senior Vice President Russell Solomon said in a report. He reiterated GE’s senior unsecured debt rating as A1, where it was cut last month from Aa3.
“The company’s strategy to become more of an industrial-focused enterprise is directionally the right one, but the credit positive impact is longer term in nature,” Solomon said.