GE’s (NYSE: GE) myriad of headwinds have generally spurred jitters among its creditors, as the beleaguered industrial conglomerate contends with constructing a sound financial strategy.

The market’s perception of Boston-based GE’s creditworthiness has been increasingly waning, amid a lack of clarity in its strategic plans to reduce leverage, as well as amid legal probes, leadership change, and cuts to its credit rating.

The option-adjusted spread (OAS) on the company’s bonds gapped wider by 8bps on the day Tuesday to more than 245bps, after announcing it was accelerating its planned separation from integrated oil subsidiary Baker Hughes (BHGE).

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Among the terms of the agreement, GE aims to sell part of its stake in BHGE for about US$2.1bn, as well as commit to a share buyback by BHGE for around US$1.5bn. Through the transactions, GE expects to maintain its ownership interest in BHGE above 50%, with its remaining stake subject to a 180-day lock-up.

The companies also agreed on a release from the lock-up restrictions under their stockholders’ agreement that previously prevented GE from selling BHGE stock until July 2019.

Following the announcement, Gimme Credit analyst Carol Levenson noted that GE “demonstrated a new sense of urgency about raising cash, presumably to pay down debt and/or to bolster its cash reserves and liquidity.” She said that raising roughly US$4bn “in a hurry without sacrificing much except for its BHGE dividends is an impressive feat,” however selling its stock close to its five-year low is “less than ideal timing and shows an element of desperation.”

GE’s shares have shed over 75% of their value from their five-year peak of US$32.93 set in mid-July 2016, amid other headwinds, including an ongoing probe into its accounting practices by the U.S. Securities and Exchange Commission and Department of Justice.

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The company’s shares were last quoted trading at around US$8.69 intraday Wednesday, according to the IBKR Trader Workstation.

Meanwhile, Levenson added that from a bond investor's perspective, GE’s recently released third quarter earnings report and call were “more noteworthy for what they left out than for what they included.” She cited, for example, that its management no longer presented a year-end cash target of US$15bn or stated it would reduce industrial net debt by US$25bn by 2020.

GE’s previous goal of reaching adjusted industrial net debt/EBITDA of less than 2.5x by 2020 was left without a definite timeline and without a quantified current leverage metric.

Gimme Credit said the firm’s industrial leverage, even when excluding pension liabilities, is likely to have risen to 3.2x and is expected to climb higher by year-end “as performance deteriorates further and the industrial business generates hugely negative free cash flow” – on the order of -US$9.7bn year-to-date, after accounting for dividends and pension contributions.

Power loss and ratings cut

In the three months ended September 30, 2018, GE posted a loss of US$2.63 per share, with adjusted EPS down 33% year-on-year to US$0.14.

The company recorded a non-cash, pre-tax, goodwill impairment charge of US$22bn, related to GE Power — also subject to SEC and DoJ investigations — and said it plans to cut its quarterly dividend from US$0.12 to US$0.01 per share in December – enabling annual cash savings of close to US$4bn.

GE also said it intends to restructure its loss-making power business by splitting the unit into two divisions – one for gas products and services, the other for steam, grid solutions, nuclear, and power conversion.

In Q3’2018, revenues in GE’s power segment plunged 33% year-on-year to US$5.7bn, with 18% fewer orders and a 1,640bp contraction in profit margin to -11%.

The deterioration spurred Moody’s Investors Service to cut the company’s credit rating to ‘Baa1’ from ‘A2’ – a lower echelon of investment-grade, and only three rungs from junk status.

Moody’s said the downgrade was partly based on the adverse impact on GE's cash flows from the deteriorating performance of its power business, which will be “considerable and could last some time.” The rating agency attributed the weaker-than-expected performance to not only a “considerable drop in market demand and ensuing heightened competition, but also to GE's misjudgment of financial prospects and operational missteps.”

Moody’s analysts Rene Lipsch, Robert Jankowitz, Mark Wasden and Ana Arsov noted that in addition to weaker earnings, cash flows in GE’s power segment are diminishing “swiftly” due to a decrease in progress collections following a steep decline in equipment orders. As a result, GE's post-dividend free cash flow will likely be “very weak” in 2018, even with decent performance at GE Aviation and GE Healthcare.

Moody's anticipates that a decline in progress collections will continue to hamper cash flows in 2019, as demand for gas turbines will remain “soft,” and GE's market share has recently come under pressure.

Other NRSROs had also cut GE’s rating after its Q3’2018 earnings release, including Standard & Poor’s and Fitch Ratings, which each downgraded the firm’s credit profile to ‘BBB+’ from ‘A’. GE lost its pristine ‘AAA’ credit rating assigned by S&P in 2009 after more than 34 years, and from Moody’s around the same time after 15 years.

Against this landscape, yields on GE’s 4.25% notes due September 2028 rose to a high of 6.11% Tuesday, an increase of about 263bps from its low set in mid-December 2017. The OAS on the firm’s 6.75% bonds maturing March 2032 widened almost 35bps on the day to 322bps.

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Moreover, the spread on the firm’s five-year credit default swap (CDS) widened Tuesday by close to 3.7bps to more than 207bps, a jump of almost 141bps over the past three months.

Payment plans

GE CFO Jamie Miller recently said the firm continues to target a leverage ratio of 2.5x net debt-to-EBITDA and expects to make “substantial progress toward this goal in the next few years.” He said that with respect to excess debt, there will be US$7bn in paydowns, with about US$9bn expected in 2019. He continued that GE Capital also has US$16bn worth of long-term debt maturities in 2020.

Overall, Miller added that GE has “significant sources available to delever and derisk the company,” including slashing its dividend, as well as divesting around US$20bn in assets, with an expected close of its distributed power business in the fourth quarter and transportation by early 2019.

Overall, while GE seems to have sufficient liquidity, it continues to need to borrow over US$10bn on an intra-quarter basis, compelling it to draw-down on its roughly US$40bn worth of revolvers.

Moody’s added that it maintains a ‘stable’ ratings outlook, as it expects GE to meet the challenges posed by its power business, as well as “considerable” borrowing needs and high debt balance, as restructuring efforts accelerate, its cash balance increases to around US$15bn and asset divestitures are completed.

GE at the start of October also shook up its management team, including the installation of new chair and CEO H. Lawrence Culp, who previously helmed Danaher Corp through it transition from an industrial manufacturer into a science and tech firm from 2001 to 2014. Over that period, Danaher’s market cap and revenue grew five-fold.

However, during GE’s Q3’2018 earnings call, Culp appeared to strike a chord of urgency with respect to raising cash. He said that while the company’s strategy of “derisking and focusing the portfolio is very much intact,” he stressed GE needs to “tend to the balance sheet as quickly as we can. We don't want to be rushed. We don't want to be rash, but we need to get after this straight away.”

Culp pointed to the “move on the dividend” as evidence of that intent in action.

Meanwhile, GE’s latest effort to raise cash by offloading a portion of its Baker Hughes stake fell against a backdrop of downbeat sentiment about the energy sector, amid a recent rout in oil prices.

Energy stocks were the worst performers on the S&P 500 Tuesday, having sunk nearly 2.4%, with high grade and high yield corporate spreads wider by more than 6.5bps and 26bps, respectively. Overall, total returns for investment-grade corporate debt were unchanged on the day, while other assets, including U.S. Treasuries and municipal bonds, were positive.