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GE Plans $5 Billion Debt Buyback to Help Tame Balance Sheet

Claire Boston and Thomas Black

(Bloomberg) -- General Electric Co. plans to buy back as much as $5 billion of bonds as the manufacturer seeks to cut its debt load as part of its turnaround.

The repurchase will cover up to $2.5 billion of dollar debt and the equivalent of $2.5 billion (2.28 billion euros) of euro-denominated notes, GE said in a statement Thursday. The company said it wouldn’t expand the size of the buyback plan.

Reducing debt is a cornerstone of Chief Executive Officer Larry Culp’s attempt to overhaul GE after one of the worst slumps in the company’s 127-year history. Since taking the helm last year, Culp has been pruning operations to focus on making jet engines, power equipment and medical scanners while tackling more than $100 billion in borrowing.

“We’re doing what we said we’d do,” Culp said at a Morgan Stanley conference Thursday. “The reset year thus far here in early September is playing out fundamentally in line with what we anticipated, but we know we have a lot more to do both with respect to the balance sheet and the way we run the business.”

The shares fell 1.1% to $9.26 at the close in New York. GE has advanced 27% this year, compared with a 22% gain for a Standard & Poor’s index of U.S. industrial companies. GE lost more than $200 billion in market value during the two-year period ending Dec. 31, as profits dropped amid flagging demand for gas turbines and high costs.

The company said Wednesday it would raise about $2.7 billion by cutting its holdings in oil-services company Baker Hughes to a minority stake. That sets GE up for about $38 billion in asset sales including the pending $21.4 billion sale of GE’s bio-pharmaceutical business to Danaher Corp., Culp said.

GE reiterated Thursday that it seeks to reduce the debt load at the industrial businesses to under 2.5 times a measure of earnings and is evaluating other options to cut debt, including pension funding and intercompany debt repayment between GE and its financial services unit.

That means GE will have to erase about $25 billion of debt at the industrial businesses from $51 billion at the end of the second quarter, Culp said. Improving profits at the company’s businesses will take more time, he said.

“With respect to running the businesses, this is what takes longer, both in terms of how we operate and having that translate into results,” Culp said.

Rate Impact

The drop in interest rates will add about $7 billion to GE’s pension obligations and deliver a hit to insurance-reserve assumptions of “somewhere south” of $1.5 billion, Culp said. GE made contributions of $6 billion to the pension fund last year that covers the company through next year, he said.

GE shares last month posted their biggest one-day plunge in 11 years after financial investigator Harry Markopolos skewered the company’s accounting. Markopolos, best known for blowing the whistle on Bernie Madoff, accused GE of fraud over the handling of its insurance and oil businesses and said “impending losses will destroy GE’s balance sheet.”

The Boston-based company called the claims meritless, with Culp criticizing the report as “market manipulation, pure and simple.” A number of Wall Street analysts and some prominent investors came to GE’s defense as well.

GE is being more transparent about its financial situation to “demystify it as much as we humanly can,” Culp said.

Major Issuer

The company said in March that it was looking at buying back debt, and said in January that it doesn’t expect to issue new debt until 2021. GE is one of the 10 biggest issuers of corporate bonds in the Bloomberg Barclays US Corporate Bond index outside of the financial sector.

The buyback offer expires on Oct. 9. Holders that submit their bonds by Sept. 25 are eligible to receive an early participation premium.

The dollar-denominated bonds that can be bought back mature between 2022 and 2044, while the euro-denominated notes are due between 2022 and 2037. The company said $8 billion of dollar-debt and 10.5 billion euros of euro-denominated debt is eligible for the offer.

JPMorgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. are managing the buyback. D.F. King & Co. is serving as the information and tender agent.

(Updates with asset sales in fifth paragraph.)

--With assistance from Brendan Case, Molly Smith and Tony Robinson.

To contact the reporters on this story: Claire Boston in New York at cboston6@bloomberg.net;Thomas Black in Dallas at tblack@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Dan Wilchins, Christopher DeReza

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