GE Will Seek Buyer for Subprime Unit After Defaults (Update1)
By Rachel Layne
July 13 (Bloomberg) -- General Electric Co. plans to sell its three-year-old U.S. subprime WMC Mortgage unit following a surge in defaults by borrowers.
``The mortgage industry has greatly changed since the purchase of WMC,'' Laurent Bossard, chief executive officer of the division, said in an e-mail to employees yesterday. ``The current subprime market environment has made a significant negative impact on the business.''
GE's decision to divest WMC comes as more than 60 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data. The contraction in the subprime industry caused the near- collapse last month of two hedge funds run by Bear Stearns Cos. and the downgrading of almost $12 billion of mortgage securities by ratings companies.
Burbank, California-based WMC this year slashed its workforce by more than half and added $330 million to reserves in the first quarter, GE said in April. General Electric may report a $150 million loss at WMC when it releases second- quarter results today, Jeffrey Sprague, an analyst at Citigroup Inc., said in a July 10 note to clients.
Shares of Fairfield, Connecticut-based GE, which trails only Exxon Mobil Corp. in market value, rose 80 cents, or 2.1 percent, to $39 yesterday in New York Stock Exchange composite trading. In Frankfurt today, GE shares declined 10 cents to $38.90.
Credit Quality
Credit-default swaps on $10 million of GE debt have jumped this week. The cost of the contracts, used to speculate on the ability of companies to repay debt, has increased $2,000 to $16,875, according to data compiled by Bloomberg. An increase signals deteriorating perceptions of credit quality.
GE Money, the consumer-finance segment of which WMC is a part, sold $3 billion in mortgages in the second quarter and has about $1.5 billion remaining, GE said earlier this month.
GE's financial adviser Morgan Stanley will explore a sale of the unit in the ``next couple of months,'' according to a copy of the e-mail obtained by Bloomberg News.
General Electric decided to sell the unit in May, a person familiar with the plan said. The decision to divest came as part of regular company reviews in which GE looks at all its operations ``to divest select businesses not within its long- term growth plans,'' the memo said.
Ratings Downgrades
The rising defaults are roiling financial markets. WMC and a unit of Washington Mutual Inc. were among four subprime lenders whose loans were behind many of the Moody's Investors Service ratings downgrades on mortgage securities this week, the firm said yesterday.
Washington Mutual's Long Beach Mortgage, WMC, New Century Financial Corp. and Fremont General Corp. made loans that backed about 60 percent of the $5 billion of bonds that were downgraded, Nicolas Weill, Moody's chief credit officer for asset finance, said on a conference call.
Standard & Poor's also downgraded $6.39 billion of mortgage bonds backed by subprime loans.
General Electric spokesman Russell Wilkerson declined to comment, adding the company will discuss its businesses including the subprime unit when it reports second-quarter earnings. Chief Executive Officer Jeffrey Immelt plans to announce the decision to sell WMC during his conference call with investors later today, the memo said.
`In and Out'
``GE's been in and out of the mortgage business before,'' said Angelo Mozilo, chief executive officer of Countrywide Financial Corp. His Calabasas, California-based company, the country's largest home lender, has said it expects to benefit as weaker rivals or competitors less dedicated to mortgages disappear during a difficult period for the cyclical business.
The biggest independent U.S. subprime lender, New Century Financial of Irvine, California, sought bankruptcy protection in April and is being liquidated.
All of the companies gave loans to people with poor credit histories or heavy debt loads who then failed to make payments. As the housing market cooled in 2006, lenders became more lax, attracting additional borrowers with weaker credit.
WMC's loss, spurred by defaults, will be offset by an estimated $500 million pretax gain from the sale of assets to a GE joint venture with Japan's Hitachi Ltd., Citigroup's Sprague said in his note. WMC provided about $100 million of the parent company's $20.8 billion in total profit last year.
Consumer Finance
The planned sale fits with Immelt's strategy of selling low-return units and re-investing proceeds in faster-growing areas including other segments of consumer finance such as credit cards. Immelt has made more than $78 billion in acquisitions and $35 billion in divestitures since he became CEO in 2001.
GE bought WMC from private-equity firm Apollo Management LP in 2004 for an undisclosed amount. General Electric had exited the U.S. mortgage business in 2000 by selling its home- loan unit to San Francisco-based Wells Fargo & Co.
GE is required to record the loans on its balance sheet at market prices, said Mark Begor, who runs the GE Money unit in the Americas, on a conference call with analysts in April. Begor said in April GE had adequate reserves of about $700 million at WMC to cover the mortgages. |
