You want a source? Here ya go. Stansberry called the bankruptcy of GM, Fannie & Freddie, Lehman & others well before they happened. GE is treading water. Read on...
Why Big Companies Go Bankrupt by Porter Stansberry 11/2009
The government of the United States reflects its people. And over the last 35 years, we Americans have added more debt to our balance sheets – both public and private – than any society ever before in human history.
This is dangerous in many ways. And it’s not only our government that’s at risk of going bankrupt – as the Greenspan-Guidotti rule will prove. Many of our largest corporations also drank the debt “Kool-Aid.” Take, for example, General Electric (NYSE: GE).
I’ve been following the debt situation at this iconic manufacturer closely since the early 2000s. I wrote a series of essays about the soaring amounts of debt in America in 2002 and 2003 called Generation Debt. (You can find reprints of these essays on the Internet)
Long before most analysts worried about mortgages and corporate defaults, I was writing about the huge risks to our economy coming from homeowners and business owners who were taking on far too much debt. My top example of a U.S. corporation that was adding far too much debt to its balance sheet was GE.
“Since 1992, GE has been a net borrower. How could America’s best company be a net borrower for ten years? Well, look at what the company is doing to make money, and it’s easy to figure out. About 50% of the company’s total debt is in the form of short-term paper – the 90-day commercial paper market it can access thanks to an AAA rating by Moody’s. The company uses this debt, which carries a low interest rate, to finance credit cards, which carry a high interest rate. If you walk into J.C. Penney or Macy’s and take out a credit card, chances are pretty good that you’re on the hook to GE. In total, GE Capital has spent $43 billion on buying such receivables in the last three years alone. And here’s the scary part. Fifteen times since 1997, the company has sold a large batch of these securities (at a loss?) less than three weeks before the end of a quarter. That’s how the company is able to match its earnings forecasts so precisely. Meanwhile, GE’s debts have mounted. Today, its balance sheet stands precariously at four times debt to equity. Why take such risks? Because these debt-laden acquisitions accounted for 40% of GE’s revenue growth from 1985 to 2000, according to Merrill Lynch analyst Jeanne Terrile (who retired immediately after publishing her study of GE’s use of debt).” – Porter Stansberry, The Debt Generation, November 26, 2002
Since 2002, when I wrote that essay, General Electric has produced $140 billion in free cash flow – real profits. It has borrowed an additional $178 billion (not including unfunded pension liabilities). Thus, it has continued to be a net debtor. GE now owes its bondholders $435 billion. It has another $248 billion in current obligations. That is not a misprint: GE owes its creditors $683 billion.
Why would GE borrow so much money?
Like all of the companies we warned you about last year (Fannie, Freddie, Bear Stearns, Lehman, GM, etc.), GE’s asset base produces only average returns. Over the last 20 years, GE’s annual return on assets has averaged 5.7% and only exceeded 6% three times. For most of the period, an investor would have done better in Treasury bonds than in GE’s assets.
So how did GE report enormous returns on equity? For the last 20 years, GE’s average annual return on equity was more than 20%. Did it fudge the numbers? No, it simply used enormous amounts of leverage.
Today, GE owns net tangible assets of only $17 billion. Thus on a tangible basis, GE is currently leveraged by more than 30-to-1. That’s roughly the same leverage employed by Lehman, Bear Stearns, and Merrill Lynch. A 3.3% decline in the value of GE’s asset base would wipe out all of its tangible equity.
In GE, we see all of the signs of an unavoidable bankruptcy. It’s built a long history of net debt accumulation. It carries huge amounts of short-term debt. (Specifically, before the end of 2012, GE must repay or refinance $240 billion.) It has a tremendous pile of average to below-average assets, many purchased at inflated prices. GE’s long-term asset base grew $200 billion (or 30%) between 2003 and 2008. GE is now engaged in a desperate effort to sell assets: 145 different divestitures, totaling at least $100 billion.
Finally, there’s the “kiss of death.” We know GE’s funding costs on its debts are about to soar. It has lost its triple-A rating and will most likely continue to be downgraded. In fact, last year, the U.S. government had to guarantee $500 billion in GE’s debt. Without the guarantee, GE would have gone bankrupt already.
With the guarantee, GE only spent $4.3 billion on interest in the last quarter. So on an annualized basis, GE is now spending roughly $17 billion each year to service its $683 billion in debt. That’s an annualized interest rate of 2.4%. This is not sustainable. Sooner or later, GE is going to have to pay a market interest rate. The government guarantee expires in 2012.
Currently, the yield on high-yield corporate debt is around 10%. Egan Jones, the only reliable ratings agency, now rates GE two slots above “junk.” Even if we assume GE could still qualify as an investment-grade credit – which is a generous assumption – it would pay something like 8% on its debt in a free market. That would cost more than $41 billion a year. Last year, GE earned $45 billion before interest and taxes – in total. It spent $33 billion of these profits on capital expenditures and necessary investments – expenses required to keep the business going. That left it with about $12 billion in what we call “owner earnings.” That’s not nearly enough money to pay the interest on its debts – whether the government backs them or not.
Imagine if the interest on your mortgage consumed 91% of your pre-tax earnings. Could you possibly avoid bankruptcy? No way, right? But there’s a big difference between owing the bank a few hundred grand and owing folks more than $500 billion. Last year, even though GE couldn’t actually afford its debts and required a government bailout, it spent $12.4 billion on dividends for common-stock holders. That’s 20% more than it spent on dividends in 2006! (GE finally cut its dividend by 70% in February 2009. It will be eliminated soon, I promise. Its creditors will finally wake up and demand it.)
Looks like $133 billion worth.
(Specifically, before the end of 2012, GE must repay or refinance $240 billion.)
I guess it's a good thing they have $124 billion in cash.
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