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General Electric: Was there a run on the bank? – General Electric (NYSE: GE)

GE Building On Rockefeller Plaza. Source: Fiveprime Earlier this month, General Electric (GE) left its use of commercial paper: .…

GE Building On Rockefeller Plaza. Source: Fiveprime

Earlier this month, General Electric (GE) left its use of commercial paper:

. At that time, the largest borrower in the market, GE Capital leaves its use of commercial paper – debt with a maturity of up to 270 days. The move can increase its financing cost, which is already under increasing pressure after downgrading to the company’s credit rating. GE’s division of financial services instead becomes more dependent on bank lending and had access to net credit facilities of $ 40.8 million at the end of September.

I knew it was one of the largest borrowers of commercial paper during the financial crisis. I also knew that GE’s funding cost would increase, but did not try to estimate the consequences. Having your commercial paper drawn may have been the first signs of a run on the bank. There may also be questions about why GE would have $ 16 billion in loans that support $ 70 billion in debt. This can be devastating to GE.

Situation

In October, Moody’s GE’s senior unsecured debt downgraded two notes from A2 to Baa1. The company’s bond yields and funding costs have peaked since the downgrade and loss of the commercial paper program. Peter Securch’s Peter Tchir claimed that the market’s fear of GE’s bonds is overblown, as approximately $ 26 billion of GE’s debt burden expired over the next two years, mostly in 2020.

However, increased funding costs are likely to have an immediate impact on GE Capital, the company’s financing arm. GE Capital had assets of $ 129 billion at Q3 2018, of which approximately $ 16 billion were related to loans and commercial mortgages. Another $ 37 billion was in cash and securities-related securities were probably due to $ 36 billion in insurance contracts.

 GE Capital Q3 2018 Balance Sheet

GE Capital had short-term loans, loans without loans and long-term loans of $ 70 billion. I assumed that $ 16 billion was used to finance funding claims and $ 54 billion for any other purpose. I find it hard to believe that the lion’s share of the $ 54 billion debt burden was not the GE debt simply parked at the financial arm.

GE Capitals funding costs could become untenable

GE Capital currently does not make money. In Q3 2018, it had a turnover of $ 2.5 billion, flat Y / Y. GE Capital Aviation Services (“GECAS”) generated $ 1.2 billion in revenue and insurance business generated another $ 700 million. Segment results were $ 0 during the quarter. For the first nine months of 2018, the segment profit was $ 0.4 billion.

These segment gains are likely to decrease further, as GE Capital’s financing costs increase. Below are bond yields for selected GE Capital bonds.

From the end of 2017 to the end of November 2018, bond yields increased from 237 points to as much as 426 points.

  • A 426-point increase in GE Capital Capitals $ 70 billion debt burden would correspond to an increase in pro forma interest cost of $ 2.8 billion.
  • GE Capitals short-term debt of 11.2 billion is likely to be replaced immediately at higher interest rates. An increase of 426 points would increase interest cost by about $ 478 million.
  • GE would likely be unbearable for GE to increase its $ 16 billion lending portfolio in view of the increase in its funding costs. It can also be difficult to sell the loans at a reasonable price given GE’s difficult endeavors.

Will the assessment agency answer?

If GE Capital’s current financing costs exceed the return on loans, the negative interest rate margin needs to be recognized. It can practically make GE Capital a black hole. This could possibly affect GE’s credit rating. GE has banking facilities in place, but has only lost about $ 2 billion in these facilities. These bank loans are more like loans – short-term funding to fund GE for a long time to end its financing arm. They may be unreasonably expensive.

In my estimation, GE’s current credit rating is so bad that Moody’s could calculate that GE is retested to junk status. Questions about GE Capital’s insecure position will not help. Can GE successfully relax its loan portfolio in view of its incredible stretches? Secondly, how much GE of Capitals $ 70 billion debt burden – and its interest expense – really belongs to GE? Does this potentially affect GE’s true debt level or its credit ratings in Moodys, S & P, or Fitch’s eyes?

Conclusion

Driving at the bank as GE experienced probably increased its funding costs. It can strengthen GE Capital’s losses and / or disproportionate (1) GE Capital to sell its loan portfolio or (2) grow the portfolio. When investors or credit rating agencies have analyzed GE Capitals potential for future losses, GE’s share price may be under pressure. Sell ​​GE.

Enlightenment: I am / we are short GE.

I wrote this article myself and express my own opinions. I’m not eligible for compensation (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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