All indications point to a company in trouble. Mike Shedlock, a brilliant financial analyst, recently quoted an insider at GE Capital. "Sales personnel are not allowed to make any more loans this year, and are being told to try to get their customers to pay off their loans. All prepayment penalties are waved for closing loans and GE Capital is about to launch a new incentive scheme for the salespeople that makes it worth their while to get their customers to agree to participate." This sounds like the actions of a company desperately trying to pay down debt. The risks and unknowns for this company are many:
GE announced plans during the summer to sell its lighting and appliance business. It expected to get $5 to $8 billion for these divisions. It has found no buyers.
GE announced that it wanted to sell its private label credit card business, with $30 billion of outstanding receivables. It is not surprising that no buyers have appeared, knowing that many of these receivables are owed by subprime borrowers. GE does not provide bad debt figures for these portfolios.
Paying Warren Buffett 10% on preferred shares when their cost of capital has been 7.3% is a sign of intense stress.
GE has $74 billion of commercial paper outstanding that rolls over every few days. GE was rumored to not being able to rollover this paper. They are now utilizing the Fed’s short-term funding facility. This is a sign of weakness.
GE holds $53 billion of off-balance-sheet assets that are pieces of securitized debt, some of which are hooked to interest rate swaps with counterparties that are now troubled. The value of these assets is a complete unknown, but is likely to worth far less than $53 billion.
GE’s recent 10Q had the following disclosure: “GE Capital has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. Many of these transactions expose GE Capital to credit risk in the event of default of its counterparty or client. In addition, GE Capital’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to it.”
Much of GE’s debt is covered by credit insurance. This insurance is virtually worthless, as the credit insurers have collapsed.
GE has $43 billion of long-term debt maturing by June 30, 2009, with another $38 billion due by December 31, 2009. The terms for refinancing this debt will be much worse than the previous terms.
GE convinced the U.S. government to insure $139 billion in debt for GE Capital using the new FDIC program. Why does a AAA company need a government guarantee?
Rumors of a dividend cut have been swirling in the business press. GE spokesmen have guaranteed the dividend only through 2009. Many other banks have promised no dividend cuts in the last year, only to cut dividends a month later.
The most hazardous unknown for GE is the global recession that will likely ravage the company in 2009. Their five main businesses (Technology Infrastructure, Energy Infrastructure, Capital Finance, NBC Universal and Consumer & Industrial) will all be under severe stress in 2009.
Technology Infrastructure is dependent on airline and military spending. Airlines are struggling just to survive and conserve cash. The Obama administration is likely to reduce military spending dramatically.
Energy Infrastructure is dependent on wind, oil and gas companies. With the spectacular decrease in oil prices, these companies are massively cutting capital budgets. Financing for large projects has dried up.
Capital Finance is dependent on consumer credit, commercial lending & leasing, and real estate. This division will be overwhelmed by a tsunami of deleveraging in 2009. Consumers will be defaulting in record numbers and commercial real estate has just begun to implode.
NBC Universal is reliant on advertising revenues from companies and consumer spending on entertainment. Every company in America will be reducing their advertising budgets in 2009 and consumer discretionary spending is collapsing.
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