General Electric (GE), one of the most iconic names in American business, is cracking up because of debts. A company founded by Thomas Edison is selling assets to survive.
“This is a slow-motion break-up of the company,” Stifel analyst Robert McCarthy tells CNN Money. For example, GE is selling off core businesses such as lighting and healthcare to raise cash.
In addition, some of GE’s oldest and most prestigious components including its railroad division are probably for sale. The plan is to raise enough cash to pay off debts and pension obligations.
General Electric had $114.9 billion debt and $263.5 billion in liabilities on 30 September 2018. Yet it generated $122.1 billion in revenues in 2017, Stockrow reports. Thus, GE cannot pay its debts with current resources.
Not surprisingly, General Electric reported a net loss of $22.8 billion and an operating loss of $20.9 billion on 30 September 2018. Under those circumstances, the only way GE can raise money is to sell assets.
However, the value of those assets may not cover General Electric’s debts. For instance, analysts value the lighting business at $600 million to $800 million, LED Inside reports.
GE could face bankruptcy
Yet General Electric faces over $15 billion in obligations from its failed finance company GE Capital, The Financial Times estimates. Thus GE could be incapable of paying its debts and facing bankruptcy.
Additionally, General Electric’s pension fund is facing a $29 billion shortfall, Forbes contributor Ken Kam calculates. To explain, the amount of pension payments GE is obligated to make exceeds the cash in the pension fund by $29 billion.
Markedly, Kam thinks bankruptcy is the only way GE can avoid making those pension payments. To clarify, if General Electric declares bankruptcy it can transfer the pension obligations to a government agency called the Pension Benefit Guarantee Corporation (PBGC).
USA corporate debts risks
The situation at General Electric puts a spotlight on USA’s corporate debts and pension crises. In detail, GE is one of many America corporate giants with massive amounts of debt and pension obligations.
For instance, struggling automaker General Motors (GM) recorded total debts of $102.3 billion on 29 November 2018. Consequently, General Motors announced a massive cost-cutting plan on 20 November 2018. The cost-cutting plan will eliminate 14,000 jobs, several factories, and several vehicles, The Detroit Free Press reports.
GE and GM are trying to avoid the fate of retail legend Sears which declared bankruptcy on 15 October 2018. Sears filed bankruptcy because it could not meet a $134 million debt payment.
Like GE, Sears is selling assets including its iconic Craftsman tools and Kenmore appliances brands. Sears is trying to avoid liquidation with a total reorganization and loans from Cyrus Capital Partners.
Moreover, Sears is struggling with pensions just like GE. Former Sears CEO Eddie Lampert admits contributing $4.5 billion to pension plans between 2005 and 2018. Sears must make payments to 90,000 pensioners.
General Motors, for its part, contributed $1.1 billion to US pension plans in 2017, according to Pensions & Benefits. In addition, GM contributed $1.2 billion to Canadian and UK pension plans in 2017.
It is estimated that the total US corporate pension plan obligations were $68.5 billion on 31 December 2017. However, America’s corporate pension plans had $62.9 billion in assets on the same day. Thus America is facing a corporate pension crisis.
General Electric at a glance
Finance legends JP Morgan and Anthony Drexel formed the company that became General Electric in 1889 by merging two companies. One of GE’s predecessors was the firm Edison organized to commercialize his light bulb.
Today, General Electric’s products include commercial and consumer finance, locomotives, jet engines, water treatment systems, power grids, appliances, and generating plants. General Electric’s former subsidiaries include the American television network NBC, which it sold in 2011.
General Electric was one of the companies that built America. GE’s debt-driven crack up could be the beginning of a new American economic crisis.