Opportunity knocks

IFR Top 250 Borrowers 2008
5 min read

US bellwether GE has long enjoyed the reputation of being able to withstand any kind of market instability, so the company’s bitterly disappointing first quarter results came as a real shock to many, underscoring the severity of the financial crisis that has constrained the world economy for almost a year. Savita Iyer reports.

In spite of the vast numbers involved, General Electric (GE) had little problem selling US$8.5bn in bonds just a few weeks after the announcement of its Q1 results. In doing so it proved what really counts – and probably even more so in a down market – is company quality, a Triple-A rating and a long history of reliability and performance.

“We anticipated demand [for the deal] would be solid, but subscription was much bigger than we thought,” said Kitty Yoh, GE’s deputy treasurer. “This was a strong endorsement.”

At this juncture market participants – issuers as well as investors – appear hopeful that the worst of the crisis is over, even as they continue to guard against any unexpected developments and contend with ongoing volatility. Issuers can’t hope for too much by way of placing debt at a price level that benefits them because spreads aren’t going to tighten for sometime, but “we are hoping for stabilisation and money seems to be coming back in,” Yoh said.

Regardless of the market climate, GE is going ahead with its plans for raising US$80bn in debt for 2008, according to Yoh. Thus far, the company has raised US$57bn, “so we are well on track to meet our goal. The proceeds will be used for general purposes in our financial service businesses [and] we are still finalising our 2009 funding plan.”

GE’s Triple A credit rating, coupled with the fact that the company can avail of global distribution of its debt in terms of both investors and the currencies that it issues paper in, places GE in an advantageous position vis-à-vis its issuer peers. Indeed, GE has been able to place paper wherever investor demand is strong, Yoh said. The company has also been in a position to take advantage of market windows when they occur.

Late last year, for instance, GE Capital issued an ¥87bn Samurai issue – a deal that went down extremely well in troublesome times (its floating-rate note tranche was a huge success). Some argued GE paid a slight premium compared to where it would have priced had the issue been in US dollars. The deal gave Japanese investors access to highly coveted GE debt at bargain prices. Even so, rival issuers and investors alike concurred that the Samurai issue sold at a far better level than what GE would have achieved in the US dollar or euro markets at that time.

In addition to its proven dexterity at issuing debt in whichever market it deems most opportune, GE continues to have strong cash flow. Every year the company sets aside between US$3bn and US$5bn to invest in industrial acquisitions. This includes investing in the energy sector – an area mergers and acquisitions (M&A) experts said will see a lot of action this year, on account of ongoing consolidation in several parts of the world.

“We are always looking at ways to invest, acquire, partner or sell to maximise the performance of our portfolio,” Yoh said. “For any M&A scenario, we would evaluate all of our funding options, depending on the size of the transaction.”

Its issuance activity is too numerous to list, coming in a wide range of currencies including euros and sterling, as well as non core currencies like Australian and Hong Kong dollars.

Holders of GE debt have recognised the company’s reliable performance and consistency over time, Yoh said. It prides itself on maintaining dialogue and communication with its investors, because “we hate disappointing [them], be they equity or debt [investors],” Yoh said. “We are working hard to deliver on our revised numbers.”

According to Citigroup analyst Jeffrey Sprague, GE has a long reputation of executing – something that currently stands the company in good stead. However, “performance has become more uneven recently,” Sprague wrote in recent research. “Large infrastructure backlogs give above average visibility on that side of the portfolio.”

GE maintains market-leading positions in each of its respective businesses and an “above-average growth profile relative to other companies in our universe,” Sprague wrote. GE is also one of the world’s largest companies and one of the few in the world that carry a Triple A credit rating. However, he said, “we also see near-term risks in

consumer-related business (appliance/lighting) as well as NBC. [But] GE’s strong

cash flow and broad global diversity partially offset these risks.”