GE Bondholders Benefit at Shareholders' Expense
July 10 2019 - 11:07AM
Dow Jones News
By Matt Wirz
General Electric Co.'s bonds are outperforming its stock by one
key measure, a sign that the company's complex restructuring is
benefiting lenders more than shareholders.
Prices of both GE's shares and bonds rebounded this year after
last fall's steep selloff, but bonds have fully recovered their
losses, while GE's equity has only retraced about 57% of its
decline.
The differential is a market manifestation of GE's strategic
about-face over the past year. The company went from overdosing on
debt so it could pay shareholder dividends to fixating on debt
reduction so it can recapture a single-A credit rating, even if
that means selling off prize assets to pay for it.
Divesting assets to reduce leverage is the bond-market version
of a shareholder buyback. Bondholders benefit from getting some of
the debt they hold paid back early and from the resulting
improvement of GE's credit profile, which boosts the values of the
bonds it leaves outstanding.
Investors seem increasingly sanguine that the trimmed-down
company can handle its debt load but far less confident about how
much will be left to fuel the growth needed to lift its stock.
"GE remains committed to deleveraging our balance sheet, which
benefits all our stakeholders," a company spokeswoman said.
The company's bonds due 2035 are trading around 99 cents on the
dollar for the first time since February of 2018, marking a 29%
gain from the low of 77 cents plumbed during the worst of the
autumn selloff. Prices of GE credit default swaps, which fall when
bond investors turn bullish, have dropped by about 57%, according
to IHS Markit.
GE's shares also benefited from the company's recent
restructuring, rebounding about 60% from the lows in December.
Still, the stock trades around $10.38, compared with $13.55 before
the fall rout and about $15 in February 2018.
Wall Street analysts have set average price targets of $12 for
the stock, according to Factset, but the most influential analyst
covering the company, Stephen Tusa of JPMorgan, says fair value is
$5. His pessimism comes, in part, from concerns about GE's aviation
unit, one of the few high-margin businesses the company plans to
keep.
Shareholders have been hoping the jet-engine manufacturer will
propel GE stock back to growth, but "there is ample evidence to
support a stand-alone fair value for GE Aviation that is below even
what we had been thinking before," Mr. Tusa wrote in a report
published June 24.
U.S. government bond yields fell Wednesday after the release of
Federal Reserve Chairman Jerome Powell's testimony on Capitol Hill.
The yield on the benchmark 10-year U.S. Treasury note traded
recently at 2.058% after topping 2.1% earlier in the day. The WSJ
Dollar Index, which measures the U.S. currency against a basket of
16 others, fell to 90.27 Wednesday from 90.58 Friday.
Write to Matt Wirz at matthieu.wirz@wsj.com
(END) Dow Jones Newswires
July 10, 2019 10:52 ET (14:52 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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