Case 1 - General Electric Standard & Poor's currently rates General Electric's (GE) debt as BBB GE's capital structure includes the following debt securities: Principal Du USD Coupons 2040 20 2 Description type 23503 RO e Power anar Under Pandes Je 2 po 2000 On 9 November 2021, GE announced that they plan to split into 3 separate companies. In early 2023, the company will have a tax-free spin-off of its health care operations and in 2024 will spin-off the GE Renewable Energy, GE Digital, and GE power into another company. This will leave GE has an aviation focused company. (See the press release, GE Plans to Fom Three Public Companies Focused on Growth Sectors of Aviation Healthcars and Energy." Shortly after the announcement went public, S&P Global Ratings announced that it would place GE's bonds under review for a possible downgrade because spinning off the healthcare operations leaves GE less diversified. (Linnane, C., 9 November 2021, S&P Global Ratings puts GE ratings on review for possible downgrade after plan to split into three companies", MarketWatch) As provided above, GE's credit rating is currently BBB. Assume that GE's debt is downgraded one grade to BB. Current yields for both BBB and BB rated bonds are: Based on this information answer the following questions: 1. Which do you think will happen first: investors re-price GE's bonds or S & P changes the ratings on the bonds? Explain why, 2. Explain the implications of moving from a BBB-rated bond to a BB-rated bond 3. Calculate the value of GE's bonds both before and after the change in bond ratings 4. Identify the bonds that have the greatest change in value. Explain why those bonds had the greatest change in value. 5. Assume the potential bond rating change has no effect on GE's equity. Explain how the rating change affects GE's cost of capital and why. 6. Is the assumption in (5) accurate? Explain why the bond rating change will have an effect on GE's beta. Case 1 - General Electric Standard & Poor's currently rates General Electric's (GE) debt as BBB GE's capital structure includes the following debt securities: Principal Du USD Coupons 2040 20 2 Description type 23503 RO e Power anar Under Pandes Je 2 po 2000 On 9 November 2021, GE announced that they plan to split into 3 separate companies. In early 2023, the company will have a tax-free spin-off of its health care operations and in 2024 will spin-off the GE Renewable Energy, GE Digital, and GE power into another company. This will leave GE has an aviation focused company. (See the press release, GE Plans to Fom Three Public Companies Focused on Growth Sectors of Aviation Healthcars and Energy." Shortly after the announcement went public, S&P Global Ratings announced that it would place GE's bonds under review for a possible downgrade because spinning off the healthcare operations leaves GE less diversified. (Linnane, C., 9 November 2021, S&P Global Ratings puts GE ratings on review for possible downgrade after plan to split into three companies", MarketWatch) As provided above, GE's credit rating is currently BBB. Assume that GE's debt is downgraded one grade to BB. Current yields for both BBB and BB rated bonds are: Based on this information answer the following questions: 1. Which do you think will happen first: investors re-price GE's bonds or S & P changes the ratings on the bonds? Explain why, 2. Explain the implications of moving from a BBB-rated bond to a BB-rated bond 3. Calculate the value of GE's bonds both before and after the change in bond ratings 4. Identify the bonds that have the greatest change in value. Explain why those bonds had the greatest change in value. 5. Assume the potential bond rating change has no effect on GE's equity. Explain how the rating change affects GE's cost of capital and why. 6. Is the assumption in (5) accurate? Explain why the bond rating change will have an effect on GE's beta
