GE Bondholders Benefit at Shareholders Expense
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.