GE Building at Rockefeller Plaza. Source: Fiveprime
Earlier this month, General Electric (GE) left the use of commercial paper:
GE Capital is once the largest borrower in the market, renouncing the use of commercial paper debt with a maturity of up to 270 days. The relocation can add financing costs, which are already undergoing upward pressure after downgrades to the company's credit rating. GE's financial services department, instead, becomes more dependent on bank lending and had available net credit facilities at $ 40.8B at the end of September.
I knew it was one of the biggest 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 impact. Having their commercial paper drawn may have been the first signs of a run on the bank. It may also ask why GE would have 16 billion dollars in loans that support $ 70 billion in debt. This can be devastating to GE.
In October, Moody's GE's senior unsecured debt downgraded two notches from A2 to Baa1. The company's bond yields and financing costs have nailed 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 overloaded, since approximately $ 26 billion of GE's debt burden was applied in the next two years, mainly in 2020.
However, increasing funding costs are likely to have immediate impact on GE Capital, the company's financing arm . In the third quarter of 2018, GE Capital had assets of 129 billion dollars, of which about 16 billion were related to loans and commercial mortgages. Another $ 37 billion was in cash and investment surpluses probably linked to its $ 36 billion insurance contracts.
GE Capital had short-term loans, foreign loans and long-term loans totaling $ 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 GE debt, just parked in the financial boom.
GE Capitals funding costs could become untenable
GE Capital currently does not earn money. In Q3 2018, Y / Y had a turnover of $ 2.5 billion. GE Capital Aviation Services ("GECAS") generated $ 1.2 billion in revenue and the insurance business generated another $ 700 million. Segment results were $ 0 in the quarter. For the first nine months of 2018, segment profit was 0.4 billion.
These segment earnings are likely to fall further as GE Capital's funding costs increase. Below are bond yields of selected GE Capital bonds.