While GE stock has stalled, the bonds have continued to perform well as GE has taken step after step to improve their balance sheet. I argued at the lows in November that the problems on the credit side were vastly overstated and could overcome relatively easily, at least in the near term (GE, the $100 Billion Credit in the Room). They have been able to accomplish that.
GE credit default swaps, which traded as high as 290 bps are back below 90 bps. Levels not seen since early October.
That is impressive performance and should be encouraging to equity holders that the credit situation is getting under control.
All their dollar-denominated bonds greater than $500 million in size trade above 98 cents on the dollar out to 2022 and most trade above 100 (their redemption price). That is an encouraging sign.
Their biggest bond deal, at $11.4 billion outstanding, the 4.418% bonds due 2035 are also trading above 90 cents on the dollar after dipping as low as 77 cents on the dollar on November 19th (according to Bloomberg). Since these bonds are longer dated it makes some sense that the bonds have stalled a bit, but it is impressive that the spreads have sustained these levels. It indicates to me that too many large bond investors were underweight this company and are deciding to buy to get back to something closer to a neutral position versus their benchmark indices.
One word of caution is the strength in the 5% Non-Cumulative Preferred Stock. These preferred shares are back to 95 cents on the dollar and are outperforming the 2035 bonds. While the enthusiasm for this security is interesting, I would be more cautious about owning Non-Cumulative Preferred stock here. They don’t have the upside of the equity, but will bear the brunt of another round of credit concerns.
The fear surrounding GE on the credit side and how easily it was rectified by the company is a good lesson to learn in this Year of the Debt Diet. The positioning in the market is not like it was ahead of the financial crisis. So, while it is good to be cautious on companies with too much debt, it can be just as bad for your portfolio to panic, especially when many of those spreading the panic have limited experience with corporate bonds.
Disclaimer: Any opinions expressed are those of Peter Tchir. This info is for educational and/or entertainment purposes only, so use at your own risk. He’s not a broker-dealer or advisor of any kind.