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. ”
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.
“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.
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.
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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