GE to liquidate GE Capital after abandoning its jet leasing unit




General Electric Co.

GE -1.61%

Managing Director Larry Culp turns off the lights on GE Capital, a once sprawling lender, and gets rid of debts that have hung over the industrial giant since the 2008 financial crisis.

GE on Wednesday agreed to combine its jet leasing unit, GE Capital Aviation Services, with rival

AerCap Holdings

ARE -1.20%

NV in a transaction worth over $ 30 billion. It will create a rental giant with more than 2,000 aircraft at a time when world travel has been hampered by the Covid-19 pandemic. The Wall Street Journal reported on Sunday that the two companies were close to an agreement.

GE will get about $ 24 billion in cash and a 46% stake in the newly merged company, a stake valued at around $ 6 billion. It will transfer approximately $ 34 billion in net assets to AerCap along with more than 400 workers. The deal is expected to be finalized in nine to twelve months.

Mr. Culp will use the proceeds from the agreement with AerCap to pay off debts and integrate the rest of GE Capital into the company’s operations. GE will take a charge of $ 3 billion in the first quarter and stop portraying GE Capital as a stand-alone business segment. The company maintained its financial guidance for 2021.

“It really marks GE’s transformation into a more focused, simpler and stronger company,” Culp said in an interview. GE will revert to being primarily a manufacturer of power turbines, jet engines, wind turbines and hospital equipment.

The Gecas aircraft leasing unit was the largest remaining part of GE Capital, accounting for more than half of the unit’s $ 7.25 billion in revenue in 2020. The rest is legacy insurance business that tormented the business and a small equipment rental operation that helps finance purchases of GE power turbines and wind turbines.

Rating companies have had different opinions on the AerCap deal and the outcome of GE Capital. S&P Global Ratings has announced that it will lower its credit rating on GE by a notch following the transaction, while

Moody’s

Investors Service said the deal does not increase GE’s overall financial risks.

Shares of GE fell 6% on Wednesday, trading at around $ 13, after rebounding from less than $ 7 in October. The stock has rallied in recent months after being hit by problems in the company’s core jet engine and jet engine business and losses at GE Capital that forced GE to sell assets and reduce its dividend.

Although GE’s industrial operations improved under Mr. Culp and the company paid off debts, concerns about GE Capital’s losses or additional risks weighed on investors. As a result of the deal with AerCap, GE will have paid off around $ 70 billion in debt since 2018.

GE chief executive Larry Culp said the company would repay $ 30 billion in debt as a result of the deal with AerCap.


Photo:

John Tlumacki / The Boston Globe / Getty Images

Mr Culp said the deal with AerCap brings GE closer to a well-capitalized company after “focusing almost entirely on deleveraging and strengthening our operations.” As this happens, he noted that paying a higher dividend becomes an option. Two years ago, GE reduced its dividend to a symbolic penny per share.

On Wednesday, GE also said its board recommended a reverse 1-for-8 stock split, a move that would reduce the number of shares outstanding. “If you look at the number of our shares, it’s completely out of whack with any peer you can imagine,” Culp said.

GE Capital was once one of the largest lenders in the country, with more than $ 600 billion in assets. He was competing

JPMorgan Chase

& Co. and other banking giants. Using GE’s blue chip credit rating, GE Capital has funded mortgages in Poland, long-term care insurance for nursing home residents and funded power plant projects in Africa.

At its peak, it generated more than half of GE’s profits. But the 2008 financial crisis made GE Capital a liability that need a rescue plan to stay afloat. From 2015, GE has sold most of the operations and investors worried about the risks on its balance sheet. Most insurance business has become

Genworth Financial Inc.

The credit card business has become

Synchrony Financial.

“GE Capital, for most investors, is viewed as more of a risk than a portion of future free cash flow,” said Daniel Babkes, partner at

Pzena Investment Management,

which owns about 90 million shares of GE, or about 1% of its outstanding shares, according to FactSet.

“Leaving GE Capital more importantly to focus on a really bright future for the industrial sector seems like a strategically smart move,” Babkes said.

GE ended 2020 with approximately $ 75 billion in debt, including more than $ 50 billion related to GE Capital. Mr Culp said the company would repay $ 30 billion in debt as a result of the deal with AerCap. He took other steps to turn around GE’s balance sheet, cutting costs, refinancing debt and divest a biopharmaceutical unit for $ 21 billion in cash.

The company’s once-triple A credit rating sits a few notches above junk status. GE has had to support GE Capital in recent years. In the fourth quarter, the parent company sent GE Capital $ 2 billion in cash.

By leaving the jet charter business, “you lose a lot of debt and that matters,” said Scott Davis, analyst at Melius Research. “This is how a lot of people think of GE’s risk profile.”

On Wednesday, S&P said that when the deal closes, it plans to lower its credit rating on GE to triple B, two notches above junk status. After the sale of Gecas, S&P said GE’s debt leverage would be higher than expected due to the consolidation of GE Capital’s financial services.

Meanwhile, Moody’s said industrial operations are not more heavily loaded following the sale of Gecas and that all the money needed to bolster GE Capital’s insurance reserves would have already come from the industrial side. He rates GE at Baa1, three notches above junk.

At an investor meeting on Wednesday, GE executives maintained their financial goals for 2021, including a goal of generating between $ 2.5 billion and $ 4.5 billion in free cash flow from industrial operations. While the energy sector is on the mend, the jet engine sector has been affected by the Covid-19 pandemic.

GE earns revenue from the sale of engines, but a much larger amount comes from servicing them over an expected lifespan of more than two decades. During the pandemic, airlines have deferred maintenance by spreading the use of aircraft across their fleets and GE expects aircraft withdrawals to increase in 2021, executives said. Maintenance visits are expected to fall 40% for the first quarter, they said, and they expect engine maintenance shop visits to return to 2019 levels by 2023.

Although GE is selling its aircraft portfolio at a difficult time in the industry, Culp has defended the timing of the deal with AerCap as GE will retain a significant stake in the combined jet leasing business. “We would never have sold Gecas for cash at this point in the cycle,” he said.

GE will be able to appoint two directors to the board of directors of the new company after its closure. Under an agreement, GE can sell part of its stake after nine months and the entire stake after 15 months.

Gecas’ withdrawal from GE Capital would leave a legacy insurance unit with around $ 50 billion in assets that is responsible for long-term care policies. In early 2018, GE surprised investors when it had to set aside $ 15 billion in reserves to cover the costs of these policies, which turned out to be more expensive than the industry expected. In the absence of Gecas, these policies now represent the bulk of GE Capital’s remaining assets.

“I’m not sure that does anything about creating more short-term options versus insurance,” Culp said, noting that the Gecas deal would strengthen GE but that the company would still need to find a partner to take over the insurance policies. “If there is a deal to be made, it will be. ”

Will GE’s decision to part with most of its stake in GE Capital put CEO Jeff Immelt in the good graces of investors? WSJ’s Dana Mattioli joins MoneyBeat for a chat. Photo: AP (Originally published April 10, 2015)

Write to Thomas Gryta at [email protected]

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