General Electric ( GE) drew big headlines when it lost its triple-A debt rating earlier this year, but its rating still looks too high next to comparable companies with lower debt. GE's debt to tangible book value of almost 90 represents more than three times as much leverage as any of 26 comparable financial and industrial companies, according to TheStreet.com's analysis of Bloomberg data. By this measure, GE has six times the leverage of Goldman Sachs ( GS), more than eight times that of Wells Fargo ( WFC) and almost 11 times the debt load of JPMorgan Chase ( JPM). Nonetheless, GE carries higher ratings from both Moody's Investors Service and Standard & Poor's.
S&P analyst Robert Schulz and his counterpart at Moody's, Richard Lane, say it is not appropriate to look at GE's leverage as a whole. Instead, they say, GE's industrial operations and its GE Capital financial unit should be viewed separately. GE spokeswoman Anne Eisele made the same argument in an email exchange with TheStreet.com. S&P analyst Scott Sprinzen argues financial companies can carry a much higher debt load than industrial ones, because in many cases they only need to be paid back a certain percentage of their loans to pay their debt. By contrast, an industrial company like Raytheon ( RTN) has to sell missiles in order to keep its creditors happy -- a much tougher hurdle. But GE is not the only industrial company with a financial unit. Caterpillar ( CAT) and Siemens ( SI) also have financial services divisions, and their debt to book value of about 10 and seven, respectively, are just a fraction of GE's. Still, they carry lower ratings. The analysts say other industrial companies with financial services units cannot be compared to GE because their financial services units are much smaller and less diversified than GE's.
Ed Ketz, an accounting professor at The Pennsylvania State University, says looking at GE's overall debt load makes sense if the parent is standing behind GE Capital. Indeed, analysts at both agencies say GE Capital would have a lower rating if the parent company were not standing behind it. Mark Wasden, analyst at Moody's, argues tangible book value puts GE in an unfairly harsh light because it excludes "goodwill," an accounting term used to describe the value placed on intangible assets when an acquisition is made. In other words, if GE pays $2 billion dollars for a company with a book value of $1.5 billion, it might claim $500 million of "goodwill," for intangible things like the value of a brand name. "If the acquired assets are performing, you should have a buildup of capital, but that occurs over time," Wasden says. But Penn State's Ketz argues goodwill is meaningless. He points to AOL's $147 billion merger with Time Warner ( TWX) in which the company wrote down $40 to $60 billion worth of goodwill a year after the deal closed, according to a 2002 BusinessWeek article citing a press release from the company in that year. "That just shows you how arbitrary it is," Ketz says. GE held a triple-A credit rating from both major credit ratings agencies for years, enabling it to raise money more cheaply than other lenders. But both Moody's and S&P took away GE's triple-A status in March, as concerns about the company's finance unit mounted and the ratings agencies endured criticism for their overly rosy view of financial companies. Though the two major ratings agencies still give GE a near perfect debt rating, Egan Jones Ratings and Analytics has a different view. Egan Jones, a ratings agency upstart that has gained some credibility during the crisis for taking a more bearish view than its larger competitors, gives GE a BBB+. That is lower than its rating for Goldman, Wells Fargo and Bank of America (all rated single-A).
Sean Egan, a founding principal at the firm, says the rating is based on the assumption that the government would provide some degree of support to GE if it became necessary. Taking away that assumption, GE's rating would be lower, Egan says. In addition to his concerns about GE's high leverage, Egan notes that GE will see $250 billion worth of debt mature over the next three and a half years. That is nearly half the total debt GE carried on its balance sheet through the end of March, Egan says. By contrast, Citigroup has $112 billion due in the next three and a half years, just 15% of its total debt. Egan is particularly puzzled by the high rating his competitors give to GE in light of the fact that the company has drawn widespread scrutiny for close to a year. "Obviously it's been reviewed at the highest levels and the first cut, second cut and third cut don't support the high rating relative to other comparable companies," Egan says, "It remains a mystery why GE is given a pass, at least from the numbers. Now you could argue that GE has more pull than Citigroup does with the U.S. government, but normally than doesn't give investors a lot of comfort."