The first signs of a new crisis. The markets are waiting for the bankruptcy of General Electric

© AP/Mike Groll Logo General ElectricThe first signs of a new crisis. The markets are waiting for the bankruptcy of General Electric© AP/Mike Groll

General Electric, one of the largest in the world, is rapidly approaching bankruptcy. Market cap industrial giant, almost half the volume of its debts. Analysts believe that the decline in the GE stock will continue, and call it the first swallow of a new global economic cataclysm. As a default the oldest American company will launch the acute phase of the next crisis — in the material RIA Novosti.

The avalanche of losses

The market has determined the main candidate for the role of a «second Lehman Brothers». It is known that the message on bankruptcy of investment Bank, one of the leading in the world, marked the beginning of the 2008 crisis.

Today the tragedy of Lehman Brothers is repeated with another famous American company — General Electric. Only last week, GE shares have fallen by 11 percent since the beginning of the year securities lost 56 percent of the cost. Now GE is about three times less than in 2007.

In the third quarter, the company reported a loss of $ 23 billion — a third of its market capitalization. Despite the fact that for the entire 2017 year net loss of GE was «only» six billion.

The improvement is not expected. Moreover, experts predict an increase in losses for at least the next two years.

«The company’s revenues in recent times showed the worst performance than expected on almost all fronts, analysts say JPMorgan. — Of the eight segments of GE that were profitable two years ago, in 2020, six barely will go to zero or even remain in the red.»

The main cause of problems General Electric called the weak demand for gas turbines — the main products of the company. However, the background to the current collapse was formed long ago.

Steep dive

Founded in 1878, the famous inventor Thomas Edison, General Electric is one of the oldest American companies.

For many decades the Corporation expanded the scope of activities and range of products. By the end of the twentieth century, it consisted of divisions on manufacture of railway locomotives, aircraft engines, weapons, medical equipment, gas turbines and electrical equipment.

There was also a unit for the sale of electricity, oil and gas and two financial «daughters»: GE Capital, which was responsible for loans and insurance, and GE Equity, engaged in buying up large blocks of shares in other companies.

General Electric was the largest company in the world. A strong blow was the global crisis of 2008. Then a Corporation almost ruined the financial daughter GE Capital, the balance of which accumulated a lot of unsecured mortgages and derivatives.

But finally crushed the brainchild of Edison top managers of the company, who in 2014 spent a lot of time and effort to convince the French government to sell them the energy business of Alstom by 10.1 billion dollars.

The leaders of GE had hoped that the deal will save the Corporation from a serious competitor and will strengthen positions in struggle with the German Siemens. However, analysts did not share their optimism.

«Such a deal would be a good ten to twenty years ago, but now wind and solar energy comparable with gas turbine and coal, besides it is very highly competitive sector, said the expert of the investment Fund Carbon Tracker Initiative Kingsmill bond in the article the Financial Times. — GE has made a fairly common mistake, confusing the current size of the market and its future growth».

It soon became clear that the analyst was right: the newly acquired assets has brought some losses.

«Untimely investment and optimistic assumptions about the growth of the market left the company with structural overcapacity in the energy sector, oil and gas, as well as in the transport sector», — stated in JPMorgan last summer.

Then it gets worse. This year began to GE with the Commission on securities and exchange Commission in connection with the improper financial practices: taking advantage of high credit rating, General Electric borrowed money at near zero real interest rates, which allowed not only to go to a poorly informed purchase, but to pay dividends in excess of net cash flow.

And in September, the company struck a new blow: several power plants in the U.S. had to suspend work because of a defect in the turbines, GE released. The energy unit was «on the verge of death,» as the leading analyst of consulting company Melius Research Scott Davies.

Last Sunday the new CEO of General Electric, Larry Culp, said that the company intends during the year to get rid of the assets at $ 20 billion to reduce debt. The first step is already made: 14 November, GE announced the sale of its insurance «daughters» of Baker Hughes.

On this news shares have grown for a while, but then resumed its fall. The debt of General Electric more than 115 billion dollars, so that 20 billion will not save anyone.

«The current level of stock prices General Electric does not reflect sufficiently fundamental changes for the worse happening to the company» — analysts JPMorgan Chase.

Target price of the stock was lowered to six dollars, which is a quarter below current quotations.

«Follow the GE is like watching slow motion train wreck,» stated Scott Davis, in comments to CNN.

Dangerous bonds

Even more than the stock price, analysts concerned about the bonds of General Electric. In October, Moody’s downgraded its rating by two notches. Formally, the bonds still retain an investment grade rating, but the market already trading at «junk» level.

In the next six years, GE will have the biggest debt payments among all companies with a similar credit rating.

Given that the market value of General Electric is now one and a half times less than the amount of the debt, there is a serious risk of default.

A default would cause panic in the markets and the mass sell-off by investors of bonds, companies, real state which does not correspond to their comparatively high credit rating.

«Rating Agency delayed responding to the deterioration of the credit metrics of companies, Forbes notes. — So many well-known corporations of today clearly do not meet the rating criteria investment grade».

Among analysts even spread a special term — «BBB -«: it is the Corporation’s credit rating at the investment level «BBB», but have serious problems with debt service.

In addition to General Electric, this category includes auto giants Ford and General Motors, as well as many other representatives of the «old industry».

The total debt of these «BBB-companies» estimated at $ 2.5 trillion. If General Electric defaulted, it all instantly turn into junk assets.

This will lead to bankruptcy of the issuers, and numerous securities holders, including pension and mutual funds. The result is a new financial crisis, comparable in scale to the global cataclysm of 2008.