, once considered the king of the debt markets, might be in danger of losing its crown as it seeks to raise $6 billion for its financing arm.
Amid concerns that the company has too much commercial paper, or short-term debt, on its books, General Electric's triple-A-rated finance arm GE Capital will probably pay higher-than-expected yields on the new offering. One analyst said the yields the issue will likely carry are more in line with those being paid by single-A rated companies.
Some worry the company's debt rating could decline. General Electric is one of only eight U.S. companies with triple-A ratings from both Moody's and Standard & Poor's.
"The feeling is that they're not as invincible as they used to be," said CreditSights analyst David Hendler. On Friday the finance unit will sell $2.25 billion of five-year notes yielding 0.75 to 0.77 percentage point more than five-year U.S. Treasuries, and $3.75 billion of 10-year notes yielding 1.06 to 1.08 percentage points more than 10-year Treasuries, according to
Banc of America Securities, Credit Suisse First Boston and Morgan Stanley are arranging GE Capital's sale.
Investors and ratings agencies have been turning up the heat on GE since March, when the company announced plans for a $50 billion debt sale less than a week after floating $11 billion on the market.
Bill Gross, a
funds manager who is considered an authority on corporate bonds,
publicly criticized the company for its over-reliance on short-term debt that wasn't fully backed by bank lines and for poor disclosure about its growth strategy, which he said is highly dependent on acquisitions funded by that short-term debt. Gross also sold his GE debt holdings.
As a general rule, financial companies are supposed to have under 40% of their debt in short-term instruments, Hendler said. GE had closer to 49%.
"They were saying, we're getting a cheaper source of funds. And the market was saying you're paying less now, but you may be paying more later. And now they are paying more," he said. "Meanwhile, that debt strategy allowed them to pursue an aggressive acquisition strategy when organic growth had been slow. If they loose that triple-A, their cost of funds go higher, and they can't do acquisitions economically."
Since the $11 billion sale was completed on March 13, GE's shares have plunged 22%. They slipped 20 cents, or 0.6%, to $31.20 Thursday on heavy trading volume.
GE has taken steps to restore investor confidence and has outlined a plan for reducing its credit risk. The company tried to increase its transparency during its first quarter conference call. GE also said it will try to reduce its reliance on short-term financing to between 25% and 30% of its debt total and move to increase the bank-line coverage of its commercial paper to 60% to 65% from 25%. With that in mind, GE obtained an $18 billion syndicated credit facility.
GE also said it plans to reduce the total amount of commercial paper on its books to between $75 billion and $85 billion by the end of the year, from $101 billion at the end of the first quarter.
Following through on those objectives is another matter. "We think this is a prudent step that the company is taking in managing its liquidity profile and refinancing risk," said Moody's analyst Robert Young. "They've laid out a strategy and we're looking for execution on that strategy," he said. S&P wasn't immediately available to comment.
Hendler said GE must show it can run a more conservative funding and balance sheet strategy, and still turn out earnings growth for a quarter or two. "If not, they may reside in this
yield zone on funding for the time being," he said.
In the meantime, some worry that the higher yields could hurt the company's profitability. When GE decided to cut back on its commercial paper funding in favor of longer-term term debt, the company said the move would cost it $80 million to $100 million a year, or a penny of earnings per share.
, which has also faced criticism for its dependence on commercial paper, said Wednesday that it plans to reduce its term debt and commercial paper programs by about one-third this year. The company set plans to sell $1 billion of 30-year global subordinated bonds Thursday.