Debt worries take toll on GE shares
Accounting issues: Comments from PIMCO's Bill Gross hit stock, bonds
Jason Chow -- Financial Post, with files from news services
General Electric Co. shares and bonds fell for the second day in a row on concerns the world's largest company is carrying too much short-term debt, and amid questions surrounding its earnings growth.
Investors have been jittery since bond guru Bill Gross, head of the largest U.S. bond fund at Pacific Investment Management Co. (PIMCO), said on Tuesday his firm unloaded all its US$1-billion of GE Capital short-term debt in recent days because of the company's debt levels.
"When anyone raises credit issues, it spooks people," said Larry Seibert, director of research for money management firm Barrett Associates, raising the spectre of a return of Enronitis.
"We're not completely through with the ripping apart of financials during this witch hunt."
The stock (GE/NYSE) has fallen US$2.45, or 6%, to US$37.45 over the past two sessions, its worst slide since September. It helped send the Dow Jones industrial average down as much as 147 points yesterday and remained down after the Dow staged an afternoon rally to close down just 21.7 points.
GE Capital, the company's financing arm, said it would sell more long-term debt in response to investors' criticisms on its reliance on commercial paper, or short-term debt, but the announcement did not stem the stock's downward spiral. Investors sent the shares down even further because long-term debt is more expensive, meaning GE's financing costs will rise.
Pacific Investment Management's Mr. Gross said he's boycotting GE Capital commercial paper until the company reduces its short-term debt holdings and discloses more information about its financing plans.
GE Capital earlier this week sold US$11-billion worth of bonds, then followed the sale with news it completed a filing to sell US$50-billion worth of securities over time. Mr. Gross said the filing should have been disclosed to bond buyers.
Mr. Gross also said he wasn't satisfied with the company's explanations for its consistent 15% earnings growth over several decades, suggesting GE puts a little too much effort into smoothing its earnings. "I sense we are not yet 'mad as hell' nor are we to the point of 'not taking it anymore.' But we should be. It's our money."
Analyst Kathleen Shanley at independent research firm Gimme Credit said she wouldn't have put GE Capital on its recently released top 10 list if it had known GE was going to file a US$50-billion shelf within days of an US$11-billion debt sale.
There are no looming fears about GE, Ms. Shanley said, but better disclosure about funding plans is in order.
Mr. Gross also pointed out GE's short-term debt was triple the amount in bank lines of credit it had access to.
Bond rating agency Moody's Investors Service got into the act, saying the company had some "funding risk" and demanded the company reduce its reliance on the short-term debt and boost its credit lines that support it.
In a bid to protect its "AAA" credit rating, the highest awarded to a company, GE Capital said it will comply with Moody's demands.
GE Capital said it was asking the banks to increase their emergency lending commitments to US$50-billion from US$33-billion. The company can tap into its bank credit should immediately should it be unable to sell short-term debt.
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