BLOOMBERG: GE Capital Says Funding Is Adequate, Profit Expected

Friday, December 4, 2009

BLOOMBERG: GE Capital Says Funding Is Adequate, Profit Expected

By Rachel Layne

March 19 (Bloomberg) -- General Electric Co. said its GE Capital finance unit won�t need more outside funding and at worst will break even under scenarios the Federal Reserve is using to test banks during a global recession and credit crunch.

GE made the forecast at a meeting today in New York where Chief Financial Officer Keith Sherin and other executives are trying to allay investors� concerns with the most detail yet about the unit�s funding, holdings, reserves and potential writedowns and losses. The unit�s businesses include credit cards, real estate, plane leasing and corporate lending.

�We�re running GE Capital to be safe and secure in this environment,� Sherin told the audience, adding that GE is �committed� to having a finance business. �We have enough capital to be able to weather a very adverse set of cases.�

GE shares dropped about 60 percent since September through yesterday, losing $144 billion in market value as investors burned by bank failures punished even finance companies tied to profitable industrial businesses. In October, GE sold $3 billion in preferred shares to billionaire Warren Buffett and $12 billion in common shares to bolster the balance sheet.

The finance arm has been stress-tested using methods the Fed employs for banks, as well as a scenario in which U.S. unemployment peaks at 10 percent and gross domestic product declines by more than 3 percent this year, GE said. The unit�s target for net income this year remains $5 billion.

�Even in the worst case, we�re break-even to slightly profitable and we have no need for outside capital,� GE Capital Chief Executive Officer Michael Neal told investors. �We�ll try to convince you of that today. �

Economic Crisis

The deepest economic crisis since the Great Depression already cost GE its top AAA credit rating from Standard & Poor�s and prompted the Fairfield, Connecticut-based company to cut its dividend for the first time since 1938.

GE�s shares touched a 17-year low March 4, the day before Sherin went on the company-owned CNBC television network to tamp down speculation about potential losses and capital needs. After his appearance, the shares climbed 55 percent through yesterday.

The stock rose 72 cents, or 7 percent, to $11.03 at 10:50 a.m. in New York Stock Exchange composite trading.

GE Capital�s $4 billion of 5.625 percent notes due in 2018 rose 1.4 cents to 90 cents on the dollar, the highest since Feb. 23, at 9:49 a.m. in New York, according to Trace, the bond- pricing service of the Financial Industry Regulatory Authority. The notes yield 7.1 percent.

Possible Bottom

�I thought GE was bottoming� at about $6 to $7, Jack De Gan, chief investment officer at Harbor Advisory Corp. in Portsmouth, New Hampshire, said in an interview. Harbor has about $100 million under management and has roughly doubled its stake in GE to about 200,000 shares in the past month.

�This dive into GE Capital might help allay some of the concerns surrounding the asset quality there,� De Gan said.

Today�s meeting at Rockefeller Center is part of GE�s response to pressure to shed more light on what it owns and the value of those holdings, even when accounting rules may not require as much disclosure for a company that isn�t a bank.

�We�ve got to continue to give people transparency and even though we�re not a bank holding company, we have to give people bank-like detail, and we intend to do that,� Chief Executive Officer Jeffrey Immelt said in a March 5 interview.

Immelt, 53, stopped providing per-share earnings forecasts this year after twice missing his predictions in 2008.

GE Capital Profit

GE Capital, the world�s largest non-bank finance company with consolidated assets of $637 billion, accounted for $8.6 billion of the parent�s $18.1 billion profit from continuing operations last year. Immelt has said he wants the division to contribute about 30 percent of annual profit.

Today�s reaffirmed outlook for 2009 net income of $5 billion at the finance unit is based on a 1.8 percent decline in U.S. GDP. Based on the Fed �base case� scenario, GE Capital would earn $2 billion to $2.5 billion. Under what GE called the estimated Fed �adverse� case, with a 3.3 percent decline in GDP, profit at GE Capital would be zero, according to slides on the company�s Web site.

Standard & Poor�s lowered GE and GE Capital�s top-tier rating one level to AA+ last week with a �stable� outlook. GE Capital may post little or no profit or possibly a �modest net loss� this year and next, the service said in its report.

Investors, comforted that the downgrade was only one step and that GE�s outlook was raised to �stable� from �negative,� have since pushed up GE shares and bonds.

Worst-Case Scenario

S&P likely already incorporated GE�s worst-case scenario in its ratings, said Joel Levington, director of corporate credit for Hyperion Brookfield Asset Management Inc. in New York. That suggests �S&P should have a pretty stable �stable� outlook, which should give bondholders incremental comfort,� he said.

Moody�s Investors Service, which said in January it was reviewing GE for a potential downgrade, has yet to complete its assessment. That review should be done in less than the typical 90 days, Moody�s said in January.

On Sept. 25, GE reduced its annual profit forecast for a second time and suspended its stock buyback. A week later, GE got a $3 billion investment from Buffett�s Berkshire Hathaway Inc. and said it would sell $12 billion in common stock.

Capital Needs

GE Capital said it has total funding sources of about $92 billion this year and $60 billion to $80 billion for 2010 as it shrinks the portfolio. Debt issuance and reduction of commercial paper balances will leave the company with $38 billion in cash this year and $31 billion to $41 billion in cash in 2010, giving the division resources for unexpected events, GE Treasurer Kathryn Cassidy said today.

The finance unit has $58.2 billion of bank lines, putting it on track to cover commercial paper outstanding as of March 11, Cassidy said.

Credit-default swaps protecting against a default by GE Capital fell 1.5 percentage point to 7.5 percent upfront, according to broker Phoenix Partners Group. That�s in addition to 5 percent a year, meaning it would cost $750,000 initially and $500,000 annually to protect $10 million. The contracts have dropped from a record 20 percent upfront on March 4.

The company�s bonds guaranteed through a Federal Deposit Insurance Corp. program remain rated Aaa by Moody�s and AAA by S&P, their highest rankings.

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