In addition to being a poster child for how far a formerly iconic name can crash when it is no longer able to “adjust” results, General Electric’s ongoing collapse, catalyzed today by the news that the SEC and DOJ have expanded their ongoing investigation to include a $22-bln writedown of goodwill from the conglomerate’s power division, is also a case study of how tighter financial conditions – in this case via 90 Day Commercial Paper – are hurting equity returns. This is shown in the chart below, in which GE stock has been tracking the rise in 90 Day CP almost rick for tick over the past 2 years (h/t Charlie McElligott).
Or perhaps there’s a less innocuous explanation that than just the correlation between 90D CP rates and GE’s price.
Recall that between GE and GE Capital, there is some $42 billion in debt maturing through 2020. Of this, a material portion is in the form of commercial paper – the type of short-term debt that caused a cash crunch for the company when the market froze in 2008. The number is fluid and varies depending on when in the quarter/year the company is, but indicatively ended 2017 with $3 billion in such paper outstanding, even as the average balance was $17.3 billion during the year’s fourth quarter.
The problem for GE – in addition to higher rates and its its latest accounting woes that have dragged its stock price to the lowest level in decades – is that it it is facing an old, familiar and potentially deadly ghost.
According to the grapevine, GE is finding itself unable to plug a growing commercial paper “hole” and as a result it has quietly been drawing on its revolver with the largest US bank to pretend that all is well, and keep shareholders fooled that it’s liquidity is adequate.
This will only be exacerbated if and when GE is downgraded, and the company’s dirty CP laundry is exposed. But while GE will likely find alternative sources of funding in a world that is still drowning in excess liquidity, the bigger question is how will the market respond when it emerges that the former industrial conglomerate is facing the same liquidity crunch that emerged during the last financial crisis, and will that become the real canary in the coalmine for the US funding market?
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