WSJ US BusinessGE to Wind Down GE Capital After Shedding Jet-Leasing Unit

March 10, 20210
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General Electric Co. GE -5.36% Chief Executive Larry Culp is turning off the lights at GE Capital, a once-sprawling lender, and shedding debts that have hung over the industrial giant since the 2008 financial crisis.

On Wednesday, GE agreed to combine its jet-leasing unit, GE Capital Aviation Services, with rival AerCap Holdings AER -4.66% NV in a deal worth more than $30 billion. It will create a leasing giant with more than 2,000 aircraft at a time when global travel has been hobbled by the Covid-19 pandemic. The Wall Street Journal reported Sunday that the two companies were near a deal.

GE will get about $24 billion in cash and 46% ownership in the new merged company, a stake it valued at about $6 billion. It will transfer about $34 billion in net assets to AerCap along with more than 400 workers. The deal is expected to close in nine to 12 months.

A Smaller GE

Mr. Culp will use the proceeds from the AerCap deal to pay down debts and fold the rest of GE Capital into the company’s corporate operations. GE will take a $3 billion charge in the first quarter and cease to report GE Capital as a stand-alone business segment. The company maintained its financial forecasts for 2021.

“This really does mark the transformation of GE into a more focused, simpler, stronger company,” Mr. Culp said in an interview. GE will essentially return to being a manufacturer of power turbines, jet engines, wind turbines and hospital equipment.

The jet-leasing Gecas unit was the biggest remaining piece of GE Capital, accounting for more than half of the unit’s $7.25 billion of revenue in 2020. The remainder is a legacy insurance business that has plagued the company and a small equipment-leasing operation that helps finance purchases of GE power turbines and wind turbines.

Credit-rating firms took different views of the AerCap deal and the unwinding of GE Capital. S&P Global Ratings said it would downgrade its credit rating on GE by one notch following the transaction, while Moody’s Investors Service said the deal didn’t increase GE’s overall financial risks.

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

Although GE’s industrial businesses have improved under Mr. Culp and the company has paid down debts, concerns about additional losses or risks from GE Capital have weighed on investors. Following the AerCap deal, GE will have paid down about $70 billion in debt since 2018.

GE Chief Executive Larry Culp said the company would pay off $30 billion in debt following the AerCap deal.

Photo: John Tlumacki/The Boston Globe/Getty Images

Mr. Culp said the AerCap deal brings GE closer to being a well capitalized company after being “almost wholly focused on deleveraging and strengthening our operations.” As that happens, he noted that paying a higher dividend becomes an option. Two years ago, GE slashed its dividend to a token penny per share.

On Wednesday, GE also said its board has recommended a reverse 1-for-8 stock split, a move that would shrink the number of shares outstanding. “If you look at our share count, it is way out of whack with any conceivable peer,” Mr. Culp said.

GE Capital was once one of the largest lenders in the country, with more than $600 billion in assets. It rivaled JPMorgan Chase & Co. and other banking giants. Using GE’s top-notch credit rating, GE Capital provided money for mortgages in Poland, long-term-care insurance for nursing-home residents and financed power-plant projects in Africa.

At its peak, it generated more than half of GE’s profits. But the 2008 financial crisis turned GE Capital into a liability that required a bailout to keep afloat. Starting in 2015, GE sold most of the operations and investors worried about risks on its balance sheet. Most of the insurance business became Genworth Financial Inc. The credit-card business became Synchrony Financial.

“GE Capital, for most investors, is seen as more of a risk than part of the future free cash flows,” said Daniel Babkes, a partner at Pzena Investment Management, which owns about 90 million shares of GE, or about 1% of its shares outstanding, according to FactSet.

“Moving on in a bigger way from GE Capital to focus on a really promising future for the industrial business, it feels like a smart move strategically,” Mr. Babkes said.

GE ended 2020 with about $75 billion in debt, with more than $50 billion of that tied to GE Capital. Mr. Culp said the company would pay off $30 billion in debt following the AerCap deal. He has taken other steps to repair GE’s balance sheet, by cutting costs, refinancing debt and selling off a biopharma unit for $21 billion in cash.

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

By exiting the jet-leasing business, “you lose a lot of debt and that matters,” said Melius Research analyst Scott Davis. “It is how a lot of people think of the risk profile of GE.”

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

Meanwhile, Moody’s said the industrial operations aren’t additionally burdened following the sale of Gecas and any money needed to bolster GE Capital insurance reserves would have already come from the industrial side. It rates GE at Baa1, three notches above junk.

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

GE receives revenue from selling engines but a far greater amount comes from servicing them over an expected life of more than two decades. During the pandemic, airlines have deferred maintenance by spreading out plane usage in their fleets and GE expects increased jet retirements in 2021, executives said. Service visits are expected to be down 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, Mr. Culp defended the timing of the AerCap deal since GE will retain a large 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 nominate two directors to the new company’s board after it closes. Under an agreement, GE can sell a portion of its stake after nine months, and the entire holding after 15 months.

The removal of Gecas from GE Capital would leave a legacy insurance unit with about $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 those policies, which proved to be more expensive than the industry expected. With the absence of Gecas, those policies now represent the bulk of GE Capital’s remaining assets.

“I’m not sure this does anything relative to creating more options in the near term relative to insurance,” Mr. Culp said, noting that the Gecas deal will strengthen GE but that the company would still need to find a partner to take on the insurance policies. “If there is a deal to be done, it will be done.”

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

Write to Thomas Gryta at thomas.gryta@wsj.com

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