General Electric's debt headaches are growing.
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Now, GE's mountain of debt, caused by years of poorly-timed acquisitions and bad decisions, is forcing the company to wean itself off the $1.1 trillion commercial paper market in favor of more expensive bank financing.
It's an abrupt shift because GE (GE) was long one of the biggest issuers of commercial paper, a form of cheap short-term borrowing that businesses rely on to pay employees and finance inventories. Recall that GE was severely hurt when the commercial paper market froze during the 2008 financial crisis. Eventually the Federal Reserve stepped in with a rescue.
The top tier of the commercial paper market is only open to companies with the sturdieset balance sheets. GE and its $115 billion of debt no longer qualify.
GE lost access to the top tier after Moody's Investors Services downgraded the company's short-term credit rating on Wednesday in part because of its "deteriorating" power business. The downgrade followed a similar move by S&P Global Ratings in early October.
GE can still tap the second tier of the commercial paper market, but that corner of the market is smaller and more expensive. It's probably not big enough to meet all of GE's vast funding needs, according to Rene Lipsch, senior credit officer at Moody's. GE and GE Capital issued as much as $14.8 billion in commercial paper last quarter.
"Due to GE's high intra-quarter funding needs," Lipsch wrote in an email, "GE will have to utilize its revolving credit facilities, which will result in an increase in funding costs."
In other words, GE's borrowing costs are going up because of its weakened balance sheet.
"Nobody leaves" commercial paper "voluntarily," Carol Levenson, director of research at Gimme Credit, a corporate bond research firm, wrote in an email.
GE shares slumped 5% on Thursday and closed below $10 for the first time since March 2009.
GE announced its retreat from the commercial paper market on Tuesday, a day before the well-telegraphed Moody's downgrade. Jamie Miller, GE's chief financial officer, said the plan is to reduce GE Capital's commercial paper balance to zero by the end of the year and reduce the overall company to a "smaller" level as well.
The good news is that GE has already been moving to shrink its short-term borrowings. And GE has $40 billion of credit lines with banks that it can use to fund the business. Miller said GE has tapped a "portion" of these revolvers.
The problem is that bank lines are more expensive and restrictive than the commercial paper market, which allows companies to quickly refinance their debt.
"This is a sign of reduced financial flexibility," Levenson said.
"GE has a sound liquidity position, including cash and operating credit lines," a GE spokesperson said in a statement. "The downgrade is manageable and we are prepared for it."
GE added that it's committed to strengthening its balance sheet by reducing leverage.
Dividend cut not enough
The painful dividend cut announced on Tuesday will save GE about $4 billion a year. The company is also planning to raise about $20 billion by getting rid of various businesses, including the healthcare division and its majority stake in oil and gas firm Baker Hughes.
However, those sales -- combined with the deep problems in its power division -- will also decrease GE's earnings firepower.
Despite GE's shrinking profits, its debt still remains hefty. GE and GE Capital listed total borrowings of $115 billion at the end of the third quarter, compared with $126 billion at the end of 2017.
After posting weaker-than-expected results on Tuesday, GE pushed back the timing on when it will achieve a stronger balance sheet. The company's new goal is to reduce its debt-to-earnings ratio to 2.5 over the "next few years." GE previously said it would hit this healthier leverage target by 2020.
GE is under pressure to clean up its balance sheet soon. In an SEC filing, GE warned that further downgrades could lift borrowing costs and potentially affect access to capital markets. The company said it could also be forced to post additional capital or collateral, hurting its capital position and liquidity.