By Rachel Layne
March 5 (Bloomberg) -- General Electric Co. Chief Financial Officer Keith Sherin said investors’ speculation about risk at GE Capital is “overdone” and that the finance arm will be profitable in the first quarter.
GE has lost about $264 billion in market value in 12 months, while posting the third-highest profit ever for 2008. Yesterday it fell a fourth straight day to the lowest closing price since November 1992. Investors are concerned GE Capital will need more outside funding to cover potential writedowns and losses in real estate, consumer credit cards and leasing.
“I think it’s overdone,” Sherin, 50, said in an interview on the company-owned CNBC television network, adding there is no “time bomb” inside the finance division. “I don’t see a need to put additional capital into GE Capital.”
GE Capital’s cost of funds is about 4.6 percent, less than last year’s, in part because of a Federal Deposit Insurance Corp. program to back debt, Sherin said. With that, plus the ability to sell commercial paper through a federal facility, he said GE has enough capacity to fund its needs through 2010.
There are several ways GE can add to the finance unit’s reserves without raising outside funds, including a further slowdown in loan originations, Sherin said.
“We are dealing with an incredibly difficult environment in the financial world, but we do not have a time bomb in GE Capital,” Sherin said.
GE Shares
GE rose 4 cents to $6.73 at 12:24 p.m. in New York Stock Exchange composite trading.
“Sherin is doing a good job of addressing the issues, and he makes a great distinction that GE is not a bank,” said Peter Sorrentino, who helps manage $15 billion at Huntington Asset Advisors in Cincinnati. “His comment that they can shrink GECC even faster if they need to by cutting originations is a point that is lost on a lot of people.”
GE is in jeopardy of losing the top-level AAA debt ratings it has held for decades. Standard & Poor’s Corp. in December said GE had a 1-in-3 chance of losing its top designation within two years, and S&P kept GE’s “negative” outlook unchanged after a dividend reduction last month. Moody’s Investors Service put GE on review in January and, after the dividend cut, said it would keep studying GE’s debt for a possible lower rating.
“Under any situation I can see, it’s not going to have an operational effect on us” if the rating is lowered, said Sherin, adding that he met with ratings agencies as recently as yesterday. It’s possible GE could end up with a AA, or with a AAA with a continued negative outlook, he told CNBC.
Chief Executive Officer Jeffrey Immelt has said he’s prepared to run GE with less than a AAA. The company plans a “deep-dive” meeting with investors the week of March 16 to explain GE Capital’s holdings in detail, Sherin said today.
No TARP Money
GE Capital, which hasn’t taken money from the federal government’s Troubled Asset Relief Program, would only consider that avenue if there was an “incredibly disastrous economic situation for us,” Sherin said. Such a move only would be “as a backup if all our other backups we have in place couldn’t work. We don’t anticipate that. We don’t have that as a plan.”
The company’s profile of businesses is different from commercial banks and less risky in part because of GE’s senior secured lending status in some areas. GE has about $4 billion in unrealized losses at its real estate unit and isn’t required to mark-to-market those assets like some banks because it’s able to hold and run those properties for years at a time, Sherin said.
GE said in February it will inject $9.5 billion into the finance division this quarter to reduce its leverage ratio to 6- to-1 net of cash, on top of the $5.5 billion it added in last year’s fourth quarter. The company ended 2008 with $48 billion in cash on its balance sheet.
Dividend ‘Backtrack’
The injections come from $15 billion raised in October, including $3 billion in preferred stock sold to Warren Buffett’s Berkshire Hathaway Inc., on top of measures such as suspending a share buyback.
GE, the world’s biggest maker of power-plant turbines, jet engines, locomotives and medical imaging equipment, reduced its annual dividend for the first time since 1938 on Feb. 27 to further bolster cash, after publicly supporting keeping the payout level since September.
The quarterly payout will be 10 cents a share instead of 31 cents in this year’s second half.
“We recognize that we’ve made statements about folks not raising equity and not cutting the dividend, and we’ve had to backtrack on those,” Sherin said. “The only thing I can say is in our defense is that we’re trying to run the company for the long term. We’ve got a real franchise here. We’re proud of it. It’s going to be around another 100 years, and we’re making decisions to make the company safe and secure.”
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