S&P downgrades debt-ridden GE and GE Capital

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General Electric’s new boss Larry Culp just got a fresh reminder of the debt-laden balance sheet he inherited.

Barely 24 hours after Culp became CEO, S&P Global Ratings downgraded the credit ratings of GE and GE Capital. Moody’s and Fitch warned that they could do the same.

All three ratings firms cited GE’s high leverage and declining cash flow – an alarming trend that has been exacerbated by serious problems in GE’s power division. GE said Monday that a decline in GE Power’s profits will cause the parent company to miss targets in 2018.

Culp, who begins the job as the first outside CEO in GE’s history, certainly has a long list of things to do. But at the top of the list should be repairing GE’s once-strong balance sheet. As recently as 2009, GE had a perfect AAA credit rating. S&P on Tuesday downgraded it to “BBB+” from “A”.

Over the past few years, GE has taken on huge amounts of debt due to poorly timed deals, massive pension losses and ill-conceived share buybacks.

Underscoring the scale of the problem, Moody’s said GE’s “very high leverage” could knock the company’s ratings down several notches. A rating downgrade could make it more expensive for companies to borrow money.

The good news is that S&P has raised its outlook on GE to “stable” as the company expects leverage and cash flow to improve in the coming years.

Still, GE’s debt problems may force the company to re-examine its $4.2 billion dividend. GE cut its dividend last year for the second time since the Great Recession.

But GE’s financial situation has worsened. S&P listed the dividend as one of several levers Culp could take to reduce debt.

In a statement, GE said it had a “strong liquidity position” including cash and operating credit lines.

Reiterating comments made by Culp on Monday, GE said it was “committed to strengthening the balance sheet, including deleveraging.”

Now that he’s in charge, Culp must decide whether he wants to move forward with former CEO John Flannery’s plan to break up GE. Flannery’s turnaround plan included exiting various businesses, including oil and gas, health care and the century-old railroad division. The proceeds from the sale will be used to repay the loan.

But GE’s shrinking has left the company more reliant on the rest of its portfolio – with GE Power being the largest remaining business. This means that the decline in electricity profits reduces GE’s ability to repay its debt.