Back from the dead? GE and Synchrony surprise the markets
admin | February 1, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Perhaps it is only a coincidence but GE and its one-time captive credit card business bounced in debt and equity market valuations this week on the heels of better-than-expected 4Q18 results with more optimistic outlooks. Nevertheless, a more defensive view should be maintained on both credits and opportunities taken to reduce positions in each in the face of better buying.
General Electric posted mixed results for 4Q18 with revenues that were lower than expected, though the $33.3 billion was up 5% year-over-year, driven by higher GE Capital revenues. The industrial division revenues were definitely under pressure, with the biggest weakness in the power division where revenues of $3.0 billion were down 29% year-over-year. That decline was slightly offset by higher renewable energy revenues, and still solid aviation revenues of $3.2 billion were up 13% year-over-year. The healthcare business, which is still in question on how it will be monetized by GE, posted 4Q18 revenues of $3.3 billion, or 4% higher year-over-year. This will remain a key component of GE’s valuation issue as the better the healthcare division performs, the higher the proceeds from a sale will be to reduce the remaining leverage of GE. And herein lies the reason for the bump in GE bonds this week: expected improvements in pro forma leverage when the restructuring is completed in the next couple years. Given that execution risk is still a material factor, the current market momentum presents an opportunity to reduce exposure across the credit curve in GE bonds. Perhaps the biggest beneficiaries in the recent trading sessions have been the GE 5.00% NC21 perpetual notes. These preferred securities are now in the $88.00 context after having been down in the low-70s in December. It is unlikely that GE will redeem these notes at the first call date, and depending on the effectiveness of the restructuring of the company the notes are all the more risky given the non-cumulative perpetual nature.
Synchrony (SYF: nr/BBB-/BBB-) got a meaningful lift in the debt and equity markets this week following the 4Q18 results – with good earnings of $783 million, underscored by solid loan growth, higher purchase volume and net interest income that rose 11% year-over-year. Investor optimism increased on the news that SYF renewed its Sam’s Club card agreement, along with similar card agreements with Amazon and Mohawk. This otherwise mundane detail is actually important given the negative reaction in 2018 investors had to the loss of the Walmart card partnership, which was acquired by Capital One. That card partnership was the largest such relationship for SYF and accounted for a large portion of net interest income and fee income. Loss of such key relationships underscores the added facet of risk to the business model beyond that of being an unsecured lender to lower-middle income consumer borrowers in a card segment with adverse credit selection. The market relief may prove to be temporary in nature, as a short-term stop-gap in the riskiest of credit card company business profiles. Nevertheless, it wasn’t only investors who took a bullish view of the Sam’s Club card news, as Fitch also took ratings action on the news with an outlook revision to “stable” from “negative”. Had the BBB-/Neg have resulted in a downgrade, it could have sent SYF bonds into a tailspin on the realization that a split-rated consumer finance company tends to have a short life. Cautious investors may prefer to take gains or lower losses from the recent bump and perhaps revisit the story at cheaper entry points down the road.
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