General Electric Company
New Coverage: Outstanding GE Debt Is Likely Structurally Subordinated to More Than $40B of Foreign GE Capital Debt; Certain Bonds Could Restrict Secured Debt at Foreign GE Capital Subsidiaries to About $25B
Tue 01/29/2019 08:20 AM
Relevant Item:
GE Debt Documents
In April 2015, GE announced its intention to reduce the size of its financial services business, General Electric Capital Corp. Throughout the rest of 2015, the company consummated a companywide reorganization that resulted in (i) GE Capital merging with and into GE, with GE as the surviving company, assuming GE Capital’s outstanding debt, (ii) the creation of a U.K. holding company under which GE Capital’s foreign finance subsidiaries were held and (iii) GE and the U.K. holding company providing irrevocable guarantees of the foreign subsidiaries’ debt.
This article discusses the relationship between GE and GE Capital after the corporate reorganization in 2015, including what is currently outstanding at each entity, plus certain guarantees and intercompany obligations. Our analysis excludes the $6.2 billion of debt owed by subsidiary Baker Hughes.
Although GE and the U.K. holding company guarantee debt issued by GE Capital’s foreign finance subsidiaries, debt issued directly by GE is not guaranteed and thus is likely structurally subordinated to $44.3 billion of debt outstanding at Sept. 30 to the extent value exists at subsidiaries of the foreign finance entities.
GE’s assumption of GE Capital’s debt created an intercompany payable owned by GE Capital. Although the payable was about $85 billion at the end of 2015, it has been reduced to about $37 billion as of Sept. 30. GE also provided a guarantee to certain GE Capital debt. On the basis of GE’s public disclosures, there is currently about $5.8 billion of outstanding GE Capital debt that is not guaranteed by GE.
Additionally, there are $13.7 billion of intercompany loans owed to GE Capital by GE. The intercompany loan balance has increased from $1.3 billion at the end of 2016 to $13.7 billion as of Sept. 30, 2018. Prior to 2018, GECC had paid a dividend to GE that totaled $20.1 billion in 2016 and $4 billion in 2017. However, in GE’s 10-K for the 2017 fiscal year, GE disclosed that because of the required contributions that GE Capital will make to its insurance business, it “does not expect to make a common share dividend distribution to GE for the foreseeable future.”
None of the debt documents governing any outstanding debt under GE’s consolidated capital structure include restrictions on incurring unsecured debt or making restricted payments (including no restrictions on prepaying outstanding debt). However, in 2015, GE Capital International Funding Company Unlimited Co. issued approximately $19.5 billion of senior unsecured notes that refinanced outstanding debt. The indenture governing these exchange notes is the only debt document under GE’s consolidated capital structure that includes a liens covenant.
Under the indenture, the U.K. holding company and its restricted subsidiaries may not incur liens on their property in excess of 20% of Consolidated Net Tangible Assets; assuming all of GE Capital’s assets are at the U.K. holding company and its subsidiaries, these exchange notes likely permit about $25 billion of secured debt.
GE’s capital structure as of Sept. 30, as disclosed by the company, is illustrated below for reference.
On April 10, 2015, General Electric Co. (“GE”) announced its intention to reduce the size of General Electric Capital Corp. (“Old GECC”), the company’s financial services business.
At that time, as illustrated below, Old GECC had issued a significant amount of debt and had guaranteed outstanding debt of certain of its international financing subsidiaries.
On Dec. 3, 2015, a companywide reorganization that resulted in Old GECC merging into GE. also included the following transactions:
However, as part of the reorganization, in addition to assuming the direct obligations of Old GECC, GE and Old GECC entered into an amendment to the financial support agreement under which, instead of making income maintenance payments to Old GECC, GE would guarantee “the payment of principal and interest on all tradable senior and subordinated outstanding long-term debt securities and all commercial paper issued or guaranteed by [Old GECC].”
Under the terms of the amendment, GE agreed to guarantee the following debt issued by Old GECC and its subsidiaries (collectively, the “GECC Foreign Subsidiary Debt”):
GE also agreed to guarantee Old GECC’s and its subsidiaries’ commercial paper programs.
On a call with investors to discuss GE’s decision to guarantee the GECC Foreign Subsidiary Debt, management noted:
As illustrated below, after the reorganization, GE, through its merger with Old GECC, became the obligor of Old GECC’s outstanding debt and, together with GECC UK Holdco, became the guarantor of the GECC Foreign Subsidiary Debt.
Because GE’s outstanding debt is not guaranteed by the foreign subsidiaries, GE’s debt is structurally subordinated to all New GECC’s foreign debt on value that resides at these foreign subsidiaries.
However, although New GECC had about $44 billion of outstanding debt as of Sept. 30, GE has disclosed that it provides a guarantee for about $38 billion of debt, suggesting that, excluding debt secured by aircraft, about $5.8 billion of outstanding New GECC debt is not currently guaranteed by GE. It is not clear from disclosures what New GECC debt does not have a guarantee from GE.
As illustrated in the capital structure chart above, about $3 billion of GE’s outstanding short-term debt and about $33 billion of its outstanding long-term debt is debt that it assumed after the merger with Old GECC.
According to a description of GE’s assumption of Old GECC’s outstanding debt included in the U.S. Financial Stability Oversight Council’s rescission of Old GECC’s designation as a nonbank systemically important financial institution:
As illustrated below, after GE’s assumption of Old GECC’s debt at the end of 2015, GE disclosed an intercompany payable owed by New GECC of approximately $85 billion; as of Sept. 30, 2018, the intercompany payable decreased to about $37 billion.
Additionally, an intercompany loan owed by GE to New GECC increased from $1.3 billion at the end of 2016 to $7.3 billion at the end of 2017 to $13.7 billion as of Sept. 30, 2018.
With respect to dividends, in 2016, Old GECC paid $20.1 billion of dividends to GE, and in 2017, it paid $4 billion. However, in GE’s 10-K for the 2017 fiscal year, GE disclosed that:
As illustrated in the chart above, beginning in 2017, New GECC began providing GE with intercompany loans. Although GE has not explicitly stated what it used the proceeds from such intercompany loans for, a portion of such proceeds could have replaced proceeds from Old GECC’s dividends to the company to reduce outstanding Old GECC debt assumed by GE.
GE also disclosed in its 10-K for the 2017 fiscal year that:
In addition to the GECC Foreign Subsidiary Debt, GE has also guaranteed certain receivables it sold to New GECC. As such, in addition to guaranteeing the payment of the GECC Foreign Subsidiary Debt, GE has also guaranteed to New GECC the payment by certain third parties.
GE is the borrower under an unsecured credit facility, composed of a $4.95 billion term loan and a $14.85 billion revolver, two $4 billion bilateral unsecured revolving facility with Citibank and Morgan Stanley and a $5 billion bilateral unsecured revolving facility with Goldman. GE is also the borrower under a $20 billion unsecured revolver entered into in 2016, although documentation for the facility does not appear to be publicly available. After the merger with Old GECC, in addition to GE’s outstanding notes issued under the same base indenture, GE also became the issuer of Old GECC’s notes that were also issued under a base indenture. None of GE’s outstanding debt appears to be guaranteed.
None of GE’s debt documents include any restrictions on GE’s ability to incur debt and liens, prepay outstanding debt, pay dividends or make investments.
It appears that the majority of the GECC Foreign Subsidiary Debt, other than debt of GE Capital International Funding Company Unlimited Co. (formerly GE International Funding Co.) was also issued under the same base indenture. As mentioned above, all such debt is guaranteed by GE and GECC UK Holdco. There are no restrictions under any of this debt that restricts the companies from incurring debt and liens, prepaying outstanding debt, paying dividends or making investments.
In October 2015, GE Capital International Funding Company Unlimited Co. issued the following senior unsecured notes (the “International Exchange Notes”) to refinance outstanding debt issued by its predecessor, GE International Funding Co.:
Unlike the other GECC Foreign Subsidiary Debt, the International Exchange Notes were issued under a separate indenture that does include a limitation on GECC UK Holdco’s and its restricted subsidiaries’ ability to incur secured debt.
Under the International Exchange Notes, GECC UK Holdco and its restricted subsidiaries may not incur liens on their property in excess of 20% of Consolidated Net Tangible Assets unless the International Exchange Notes are equally and ratably secured.
Although GE does not disclose which of New GECC’s assets are held by GECC US Holdco and its subsidiaries and which are held by GECC UK Holdco and its subsidiaries, assuming all assets of New GECC are at GECC UK Holdco and its subsidiaries, on the basis of our calculations below, the International Exchange Notes may permit GECC UK Holdco and its restricted subsidiaries to incur about $25 billion of secured debt.
On June 26, 2018, the company announced that after a strategic review, the company would focus on its Aviation, Power and Renewable Energy divisions and, in addition to divesting its Transportation business to Wabtec, the company would separate its Healthcare and Baker Hughes (oil and gas) divisions into standalone companies. In announcing the changes, the company stated:
The company also announced certain targeted balance-sheet improvements:
In addition to merging its Transportation business with Wabtec and its plans to separate the Healthcare and Baker Hughes divisions, during 2018, GE announced the following additional divestitures:
GE Debt Documents
Executive Summary
In April 2015, GE announced its intention to reduce the size of its financial services business, General Electric Capital Corp. Throughout the rest of 2015, the company consummated a companywide reorganization that resulted in (i) GE Capital merging with and into GE, with GE as the surviving company, assuming GE Capital’s outstanding debt, (ii) the creation of a U.K. holding company under which GE Capital’s foreign finance subsidiaries were held and (iii) GE and the U.K. holding company providing irrevocable guarantees of the foreign subsidiaries’ debt.
This article discusses the relationship between GE and GE Capital after the corporate reorganization in 2015, including what is currently outstanding at each entity, plus certain guarantees and intercompany obligations. Our analysis excludes the $6.2 billion of debt owed by subsidiary Baker Hughes.
Although GE and the U.K. holding company guarantee debt issued by GE Capital’s foreign finance subsidiaries, debt issued directly by GE is not guaranteed and thus is likely structurally subordinated to $44.3 billion of debt outstanding at Sept. 30 to the extent value exists at subsidiaries of the foreign finance entities.
GE’s assumption of GE Capital’s debt created an intercompany payable owned by GE Capital. Although the payable was about $85 billion at the end of 2015, it has been reduced to about $37 billion as of Sept. 30. GE also provided a guarantee to certain GE Capital debt. On the basis of GE’s public disclosures, there is currently about $5.8 billion of outstanding GE Capital debt that is not guaranteed by GE.
Additionally, there are $13.7 billion of intercompany loans owed to GE Capital by GE. The intercompany loan balance has increased from $1.3 billion at the end of 2016 to $13.7 billion as of Sept. 30, 2018. Prior to 2018, GECC had paid a dividend to GE that totaled $20.1 billion in 2016 and $4 billion in 2017. However, in GE’s 10-K for the 2017 fiscal year, GE disclosed that because of the required contributions that GE Capital will make to its insurance business, it “does not expect to make a common share dividend distribution to GE for the foreseeable future.”
None of the debt documents governing any outstanding debt under GE’s consolidated capital structure include restrictions on incurring unsecured debt or making restricted payments (including no restrictions on prepaying outstanding debt). However, in 2015, GE Capital International Funding Company Unlimited Co. issued approximately $19.5 billion of senior unsecured notes that refinanced outstanding debt. The indenture governing these exchange notes is the only debt document under GE’s consolidated capital structure that includes a liens covenant.
Under the indenture, the U.K. holding company and its restricted subsidiaries may not incur liens on their property in excess of 20% of Consolidated Net Tangible Assets; assuming all of GE Capital’s assets are at the U.K. holding company and its subsidiaries, these exchange notes likely permit about $25 billion of secured debt.
Capital Structure
GE’s capital structure as of Sept. 30, as disclosed by the company, is illustrated below for reference.
Background - The 2015 Reorganization; GECC Merges With GE; Structural Subordination
On April 10, 2015, General Electric Co. (“GE”) announced its intention to reduce the size of General Electric Capital Corp. (“Old GECC”), the company’s financial services business.
At that time, as illustrated below, Old GECC had issued a significant amount of debt and had guaranteed outstanding debt of certain of its international financing subsidiaries.
On Dec. 3, 2015, a companywide reorganization that resulted in Old GECC merging into GE. also included the following transactions:
- Old GECC merged with and into GE, with GE assuming obligations of Old GECC under its then-outstanding debt obligations;
- GE Capital Global Holdings LLC (“New GECC”), a newly formed U.S. intermediate holding company, replaced Old GECC as the holding company of Old GECC’s operations;
- Old GECC’s domestic operations were consolidated under a new U.S. holding company, GE Capital US Holdings (“GECC US Holdco”);
- Old GECC’s international operations were consolidated under a new U.K. holding company, GE Capital International Holdings Limited (“GECC UK Holdco”); and
- GECC UK Holdco assumed Old GECC’s guarantees of all outstanding debt issued by Old GECC’s international subsidiaries.
“GE will make payments to GECC, constituting additions to pre-tax income under the agreement (which increases equity), to the extent necessary to cause the ratio of earnings to fixed charges of GECC and consolidated affiliates (determined on a consolidated basis) to be not less than 1.10:1 for the period, as a single aggregation, of each GECC fiscal year commencing with fiscal year 1991.”
However, as part of the reorganization, in addition to assuming the direct obligations of Old GECC, GE and Old GECC entered into an amendment to the financial support agreement under which, instead of making income maintenance payments to Old GECC, GE would guarantee “the payment of principal and interest on all tradable senior and subordinated outstanding long-term debt securities and all commercial paper issued or guaranteed by [Old GECC].”
Under the terms of the amendment, GE agreed to guarantee the following debt issued by Old GECC and its subsidiaries (collectively, the “GECC Foreign Subsidiary Debt”):
GE also agreed to guarantee Old GECC’s and its subsidiaries’ commercial paper programs.
On a call with investors to discuss GE’s decision to guarantee the GECC Foreign Subsidiary Debt, management noted:
“We amended the income maintenance agreement to provide a guarantee on all GE Capital's tradable senior and subordinated debt securities and commercial paper issued or guaranteed by GE Capital. We believe this provides clear GE support of GE Capital's debt securities and the flexibility to execute this new plan.”
As illustrated below, after the reorganization, GE, through its merger with Old GECC, became the obligor of Old GECC’s outstanding debt and, together with GECC UK Holdco, became the guarantor of the GECC Foreign Subsidiary Debt.
Because GE’s outstanding debt is not guaranteed by the foreign subsidiaries, GE’s debt is structurally subordinated to all New GECC’s foreign debt on value that resides at these foreign subsidiaries.
However, although New GECC had about $44 billion of outstanding debt as of Sept. 30, GE has disclosed that it provides a guarantee for about $38 billion of debt, suggesting that, excluding debt secured by aircraft, about $5.8 billion of outstanding New GECC debt is not currently guaranteed by GE. It is not clear from disclosures what New GECC debt does not have a guarantee from GE.
GE’s Assumption of Debt; Intercompany Payables and Receivables and Dividends
As illustrated in the capital structure chart above, about $3 billion of GE’s outstanding short-term debt and about $33 billion of its outstanding long-term debt is debt that it assumed after the merger with Old GECC.
According to a description of GE’s assumption of Old GECC’s outstanding debt included in the U.S. Financial Stability Oversight Council’s rescission of Old GECC’s designation as a nonbank systemically important financial institution:
“Subsequently, GE assumed [Old GECC’s] outstanding U.S. long-term debt and established a payable between [New GECC] and GE under which [New GECC] agreed to make payments to GE to service the assumed debt.”
As illustrated below, after GE’s assumption of Old GECC’s debt at the end of 2015, GE disclosed an intercompany payable owed by New GECC of approximately $85 billion; as of Sept. 30, 2018, the intercompany payable decreased to about $37 billion.
Additionally, an intercompany loan owed by GE to New GECC increased from $1.3 billion at the end of 2016 to $7.3 billion at the end of 2017 to $13.7 billion as of Sept. 30, 2018.
With respect to dividends, in 2016, Old GECC paid $20.1 billion of dividends to GE, and in 2017, it paid $4 billion. However, in GE’s 10-K for the 2017 fiscal year, GE disclosed that:
“On January 16, 2018, GE reported the results of a review of premium deficiency assumptions related to GE Capital’s run-off insurance business. … GE Capital will contribute approximately $15 billion of capital to its run-off insurance business over the next seven years. GE Capital plans to make its first contribution of approximately $3.5 billion in the first quarter of 2018 and expects to make further contributions of approximately $2 billion per year in each of the six following years, subject to ongoing monitoring by the Kansas Insurance Department, its primary regulator. GE Capital plans to fund the capital contributions with its excess liquidity and other GE Capital portfolio actions and does not expect to make a common share dividend distribution to GE for the foreseeable future.”
As illustrated in the chart above, beginning in 2017, New GECC began providing GE with intercompany loans. Although GE has not explicitly stated what it used the proceeds from such intercompany loans for, a portion of such proceeds could have replaced proceeds from Old GECC’s dividends to the company to reduce outstanding Old GECC debt assumed by GE.
GE also disclosed in its 10-K for the 2017 fiscal year that:
“As of December 31, 2017, GE Capital had approximately $10.4 billion recorded on its balance sheet related to current receivables purchased from GE. Of these amounts, approximately 40% had been sold by GE to GE Capital with recourse (i.e., the GE business retains the risk of default).”
In addition to the GECC Foreign Subsidiary Debt, GE has also guaranteed certain receivables it sold to New GECC. As such, in addition to guaranteeing the payment of the GECC Foreign Subsidiary Debt, GE has also guaranteed to New GECC the payment by certain third parties.
Restrictions Under Debt Documents
GE is the borrower under an unsecured credit facility, composed of a $4.95 billion term loan and a $14.85 billion revolver, two $4 billion bilateral unsecured revolving facility with Citibank and Morgan Stanley and a $5 billion bilateral unsecured revolving facility with Goldman. GE is also the borrower under a $20 billion unsecured revolver entered into in 2016, although documentation for the facility does not appear to be publicly available. After the merger with Old GECC, in addition to GE’s outstanding notes issued under the same base indenture, GE also became the issuer of Old GECC’s notes that were also issued under a base indenture. None of GE’s outstanding debt appears to be guaranteed.
None of GE’s debt documents include any restrictions on GE’s ability to incur debt and liens, prepay outstanding debt, pay dividends or make investments.
It appears that the majority of the GECC Foreign Subsidiary Debt, other than debt of GE Capital International Funding Company Unlimited Co. (formerly GE International Funding Co.) was also issued under the same base indenture. As mentioned above, all such debt is guaranteed by GE and GECC UK Holdco. There are no restrictions under any of this debt that restricts the companies from incurring debt and liens, prepaying outstanding debt, paying dividends or making investments.
In October 2015, GE Capital International Funding Company Unlimited Co. issued the following senior unsecured notes (the “International Exchange Notes”) to refinance outstanding debt issued by its predecessor, GE International Funding Co.:
- $6,106,952,000 of 2.342% Senior Notes due 2020 (approximately $6,093,750,000 currently outstanding);
- $1,979,425,000 of 3.373% Senior Notes due 2025 (approximately $1,954,420,000 currently outstanding); and
- $11,464,668,000 of 4.418% Senior Notes due 2035 (approximately $11,406,510,000 currently outstanding).
Unlike the other GECC Foreign Subsidiary Debt, the International Exchange Notes were issued under a separate indenture that does include a limitation on GECC UK Holdco’s and its restricted subsidiaries’ ability to incur secured debt.
Under the International Exchange Notes, GECC UK Holdco and its restricted subsidiaries may not incur liens on their property in excess of 20% of Consolidated Net Tangible Assets unless the International Exchange Notes are equally and ratably secured.
Although GE does not disclose which of New GECC’s assets are held by GECC US Holdco and its subsidiaries and which are held by GECC UK Holdco and its subsidiaries, assuming all assets of New GECC are at GECC UK Holdco and its subsidiaries, on the basis of our calculations below, the International Exchange Notes may permit GECC UK Holdco and its restricted subsidiaries to incur about $25 billion of secured debt.
GE’s Streamlined Business Segments
On June 26, 2018, the company announced that after a strategic review, the company would focus on its Aviation, Power and Renewable Energy divisions and, in addition to divesting its Transportation business to Wabtec, the company would separate its Healthcare and Baker Hughes (oil and gas) divisions into standalone companies. In announcing the changes, the company stated:
“We are aggressively driving forward as an aviation, power and renewable energy company - three highly complementary businesses poised for future growth. We will continue to improve our operations and balance sheet as we make GE simpler and stronger.”
The company also announced certain targeted balance-sheet improvements:
“GE is targeting an Industrial net debt-to-EBITDA ratio of less than 2.5 times and a long-term A credit rating. GE also plans to reduce Industrial net debt by approximately $25 billion by 2020 and maintain more than $15 billion of cash on the balance sheet.”
In addition to merging its Transportation business with Wabtec and its plans to separate the Healthcare and Baker Hughes divisions, during 2018, GE announced the following additional divestitures:
- Selling its Enterprise Financial Management, Ambulatory Care Management and Workforce Management assets to Veritas Capital for approximately $1 billion in April; this transaction closed in July;
- Selling its Distributed Power business within the Power segment to Advent International for $3.3 billion in June;
- Selling its Energy Financial Services debt origination business within the Capital segment to Starwood Property Trust Inc. for approximately $2 billion in August; this transaction closed in September.
- Selling its Middle River Aircraft Systems business within the Aviation segment to Singapore Technologies Engineering for $0.6 billion in September; and
- Selling a portfolio of approximately $1 billion of investments in energy assets to Apollo Global Management LLC in October.
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