General Electric shareholders offered their latest endorsement of new Chief Executive Larry Culp this week when they approved a 2018 pay package worth $15 million.
But perhaps the more notable endorsement of Culp's efforts to turn around the fortunes of the 127-year-old conglomerate has come from a more skeptical crowd: bondholders.
GE's 10 largest outstanding U.S. bonds are up an average of 11.73% in the new year, besting the ICE BAML index of bonds rated BBB, which has a total return 6.53% in that time. That's a stunning turn around for a basket of debt that had swooned so heavily last year that the bond market was rife with chatter that GE might lose its investment-grade credit rating.
Earnings on April 30 showed the Boston-based company still had a way to go in its turnaround efforts, but Culp's plan to reduce the company's $110 billion debt load has nevertheless spurred interest from bondholders.
The rise in bond prices is "definitely a recognition of the fact (Culp) does have a plan and that maybe things have bottomed out for GE," said Mark Jackson, portfolio manager at Diamond Hill Capital.
"They have someone who recognizes that they need to delever and adjust cash flows and become a better operating company... Now there's someone in charge who has a plan to actually accomplish those two very pressing needs."
Culp was appointed last October just before GE was downgraded by credit rating agencies to just three notches above "junk" status on the grounds that its debt load looked untenable as its earnings faltered. GE's share price has fallen by more than two-thirds since 2016 and last year it reported a $23 billion loss.
Since taking over, Culp has sold GE assets including its biopharma business to rival U.S. conglomerate Danaher Corp for $21.4 billion. Culp in March forecast that 2019 earnings would be below analyst expectations and reiterated on Wednesday the company will likely have weaker quarters for the rest of the year after a surprisingly good start in the first quarter.
For now, the plan to delever may be enough.
"We started (buying the debt) when they announced the sale of their healthcare unit," said Monica Erickson, portfolio manager at DoubleLine Capital. "They're doing the right things, but it remains to be seen whether it all works out or not."
Jackson also said he had bought the debt recently at least in part because of Culp's potential to revive the company. "Yes I do have some exposure," he said.
"I wish I could say that I got in at the wides, but that would not be true," said Jackson, referring to the moment when GE's credit spreads were the most aggravated.
GE is not the only company under pressure to reduce its debt balance.
From 2015-2018, as low interest rates enabled companies to take on more debt, U.S. non-financial company leverage rose to 15 times earnings from 12 times just after the 2008 financial crisis, according to research from Moody's Investors Service.
Like GE, some of those companies are now looking to lighten that load. AB InBev has announced plans to reduce its $100 billion debt load, and Kraft Heinz, Verizon Communications, and AT&T have all put themselves on debt diets this year.
While the risk of distraction may be high now that the Federal Reserve has paused its rate hikes, "companies that did these big mega-deals and levered up to do them," said Jackson, now must "live up to their commitments to delever."