Bonds backing General Electric Co. held to firm footing in the wake of confirmation that AerCap Holdings NV would buy 100% of GE Capital Aviation Services Inc. (GECAS), though GE's ratings standing is unsteady as GE Capital debt will remain at the conglomerate.
S&P Global Ratings today said it would review GE's BBB+ long-term credit rating for possible downgrade, as it projects GE debt leverage rising to roughly 6x to reflect the consolidation of GE Capital's remaining debt. Ratings currently projects a one-notch cut, to BBB.
The GECAS business represented the biggest piece of the broader GE Capital business. The deal with AerCap, valued at more than $30 billion, will drive some $25 billion of cash and equivalents to GE, along with the $6 billion equity interest in the combined entity, which would give GE a 46% stake in the mammoth new lessor. S&P Global Ratings at present expects GE to use all of the cash proceeds to reduce debt, and said it expects “significant deleveraging as the aviation segment rebounds and the company uses free cash flow and asset sale proceeds to reduce debt further.” It plans to resolve the ratings review near when the transaction closes, which is expected in 10-12 months.
Moody's and Fitch, meanwhile, today affirmed their respective Baa1 and BBB ratings on GE. Moody's maintains a negative outlook for its relatively higher grade, while the Fitch outlook is stable. Fitch said that, given the long time frame for closing the transaction, there is a chance that the ratings outlook could shift to positive at closing depending on the pace of deleveraging via free cash flow, and the state of the business for GE Industrial.
Moody's stated that, while more than $20 billion of debt will remain at GE Capital after the sale of GECAS and initial debt reduction, “the remaining debt does not reflect an increase in financial risk, in Moody's view.”
GE's most active bond issue this morning is the 4.418% issue of notes due 2035 issued by GE Capital International Funding Co., which tightened roughly 10 bps, to new pandemic-era lows bracketing T+157. The notes changed hands as wide as the T+500 area in the early days of the COVID-19 crisis in March 2020, and they traded north of T+300 in October 2020, ahead of November's string of positive vaccine developments.
At the holding-company level, the GE 4.35% bonds due 2050 edged tighter to T+148, from T+160 last Friday, and T+285 in October 2020. GE priced the notes last April, at T+300, one day after Fitch cut the company's rating by one notch in the face of expected elevated industrial leverage relative to peers and materially lower free cash flow in the face of pandemic headwinds.
Market quotes for the price to buy five-year protection in credit default swaps (CDS) against GE's debt continued lower this morning, to the 75 bps area, from closes at 81 bps yesterday and 91 bps on Friday, according to S&P Global Market Intelligence. Those debt-protection costs are down from the 150 bps area in October 2020, and 437 bps at the pandemic-era peak on March 23, 2020.
AerCap, meanwhile, rests on the divide between investment-grade and high-yield ratings. Fitch today placed AerCap's cusp-level BBB- rating under review for downgrade, though it said it could resolve that review “if and when” the company is able to term out the bridge financing necessary to complete the blockbuster deal.
AerCap has netted $24 billion of committed financing from Citi and Goldman Sachs. AerCap today said that it expects to maintain its current investment-grade credit ratings across all three agencies. It believes the transaction “will enhance many of AerCap's key credit metrics, as the combined company will have stronger cash flows and a more diversified revenue and customer base.”
Moody's today affirmed AerCap's Baa3 grade with a negative outlook. S&P Global Ratings said its BBB rating and negative outlook on AerCap are unlikely to be affected by the transaction, as it believes “leverage will increase only modestly while the company will solidify its position as the largest aircraft operating lessor, by far.” S&P Global Ratings further noted AerCap's track record in reducing mountains of M&A debt, as evidenced by its even weightier 2014 acquisition of International Lease Finance Corp.
While the issuer's IG ratings may survive, its debt is under pressure in the face of the looming debt raise to back the acquisition. AerCap's 1.75% notes due 2026 traded 15 bps wider this morning, to the T+175 area, or roughly 30 bps wider week over week, and versus new-issue pricing of the notes on Jan. 6 this year at T+155.
