GE Says Short-Term Debt Isn't a Problem
Swimming against an ebbing tide of investor confidence, General Electric (GE) Thursday issued a press release defending its financial condition. But the big conglomerate failed to tell investors anything they didn't already know.
GE stock slid 3% Wednesday after the nation's leading bond fund manager, Bill Gross of Pimco, criticized GE's leverage and disclosure practices. The stock fell a further 3.5% Thursday and the company's bond spreads widened, indicating investors believe default risk -- however remote, considering GE's unblemished credit rating -- is increasing.
In his critique Gross complained (among other things) that GE Capital hadn't sufficiently backed its massive commercial paper issuance with bank credit lines. Most companies arrange bank lines to cover all of their outstanding commercial paper -- short-term debt used to finance operations -- but GE Capital has backed less than a third of its $103 billion in paper with bank lines.
Gross was only echoing recent comments by boutique investment research firm Gimme Credit and rating agency Moody's Investors Services, but since he is the world's biggest bond fund manager it was his commentary that moved the market.In its press release, GE said that while it would continue to use commercial paper, it would reduce commercial paper as a percentage of total debt to 25%-35% by the end of the year, from 42% now. It also said it was increasing its backup bank lines to $50 billion from $33.5 billion. All this had been reported previously in stories covering Gross's comments and GE's response. The release said that "GE will continue to manage its debt portfolio in a strategic and orderly way over the course of the year. GE has all the financial resources necessary to achieve the growth objectives it has laid out for investors." Finally, GE reiterated its earnings target of $1.65 to $1.67 for the year, before accounting charges, and said earnings would be higher if the economy recovers. All of this may be enough to appease many investors. But for those who have concerns about GE's lack of back-up lines for its commercial paper, it still falls short. While the company is arranging bank lines, it's still clear that $50 billion isn't going to be enough to cover all its commercial paper.
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