GE Capital Bows to Pressure From Moody's on Debt (Update1)
By Emma Moody and Liz Goldenberg
New York, March 18 (Bloomberg) -- General Electric Capital Corp. is bowing to demands from Moody's Investors Service that the biggest seller of commercial paper reduce its reliance on short- term debt securities.
The financing arm of General Electric Co., the world's largest company, is seeking bigger lending commitments from banks and replacing some of its $100 billion in debt that matures in less than nine months with bonds. GE Capital is asking banks to raise its borrowing capacity to $50 billion from $33 billion.
Moody's, one of two credit-rating companies that have assigned GE Capital the highest ``AAA'' grade, has been increasing pressure on even top-rated firms to reduce short-term liabilities since Enron Corp. filed the biggest U.S. bankruptcy in December. Moody's reported today on the ability of about 300 companies to raise money if shut out of the commercial paper market.
``Issuers and ratings agencies are looking at coverage issues with more attention than ever before,'' said Peter Stack, a spokesman for GE Capital. ``The specific step in increasing coverage is in line with new guidelines from Moody's.''
GE Capital and H.J. Heinz Co. said they responded to inquiries by Moody's by reducing their short-term debt, unsecured obligations used for day-to-day financing. Concerns about the availability of such funds have grown this year after Qwest Communications International Inc., Sprint Corp. and Tyco International Ltd. were suddenly unable to sell commercial paper.
``It will force companies to be more transparent about these matters, while making investors more demanding,'' said Paul McCulley, a managing director at Pacific Investment Management Co., who oversees traders with more than $20 billion invested in commercial paper.
Rating Downgrades
Moody's lowered a record 93 commercial paper ratings last year as the economy slowed, causing corporate defaults to increase to their highest in a decade. One area of concern for the analysts is the amount of bank credit available to repay commercial paper.
While many companies have credit lines equivalent to the amount of commercial paper they sell, some of the biggest issuers do not. Stamford, Connecticut-based GE Capital, for example, has loan commitments backing 33 percent of its short-term debt.
That partial coverage ``exposes a large borrower like GE Capital to funding risk,'' Moody's said in its assessment of the firm. The risk is mitigated by the diversity of the financing company's assets and its relationship to General Electric.
American Express
American Express Co. has commitments that cover 56 percent of its commercial paper. Coca-Cola Co. supports about 85 percent of its debt with bank agreements, according to Standard & Poor's.
``A number of companies are certainly looking at their liquidity policies in light of the volatility in these markets,'' said Blaine Frantz, who covers GE Capital and American Express at Moody's. ``Even GE Capital is able to see what is happening.''
Moody's new reports measure companies' ability to repay debts with cash and asset sales. The reports also indicate conditions that would allow banks to refuse to lend. Moody's assigns ratings of ``P1'', ``P2'', ``P3'' and ``Not-Prime'' to commercial paper issuers. Typically, only ``P1'' and ``P2'' companies can sell unsecured short-term debt.
S&P, the largest credit-rating company, said it is also focusing more attention on risks posed by short-term liabilities, though it hasn't yet decided whether to issue separate reports.
Flexible, Cheap
Commercial paper is attractive because it is flexible -- it can be sold immediately -- and cheap. Top-rated commercial paper issuers pay about 9 basis points below benchmark lending rates to borrow for one month. By contrast, loans cost about 20 basis points more than benchmark rates and bonds more than that. Loans and bonds also tend to require advance notice to be arranged.
Anticipating reduced demand, some companies have pared the short-term debt they sell in favor of more bonds. Companies have sold $107 billion of investment-grade bonds this year, up from $88 billion during the same period in 2001. The amount of unsecured commercial paper outstanding has fallen by a third to $672 billion during the past 12 months.
H.J. Heinz Treasurer Len Cullo said concern about how Moody's would assess the world's biggest ketchup maker in its report prompted him to organize a sale of $1.25 billion of bonds last month, using some of the proceeds to buy back commercial paper.
``If you're going to do funding, you may as well get it done ahead of time,'' said Cullo, who said the recent spate of corporate bond sales was due in part to the new Moody's reports.
Heinz saw its debt lowered one level to ``P2'' by Moody's on Jan. 23. The change pushed up the amount it pays to sell commercial paper by about 30 basis points, or $400,000 a month for the $1.6 billion it had outstanding. A basis point equals 0.01 of a percentage point. Cullo said he expects his company to receive a ``liquidity'' report from Moody's that is ``at least adequate.''
Won't Change
Not every company is changing its borrowing tactics. American Express, which carries a top ``P1'' rating, has no plans to increase the $10 billion in bank commitments that back its $18 billion of commercial paper. ``We are a highly rated company and these are decisions that the financing people make on a regular ongoing basis,'' said spokesman Michael O'Neill. He said that the company also has $3 billion in additional credit arrangements that could be used to cover obligations.
GE Capital, which has reduced its commercial paper outstanding from $117 billion at the beginning of the year, plans to continue to reduce short-term debt, said spokesman Stack. It took one step in that direction last week when it sold $11 billion of long-term bonds, some of which will be used to reduce its outstanding commercial paper, said Stack.
The sale of bonds ``should reduce its reliance on short-term funding,'' Moody's said in its assessment.
As part of last week's sale, GE Capital sold 30-year bonds with a coupon of 6.75 percent. The company usually swaps some or all of those fixed-rate payments for floating-rate obligations. Last year, GE Capital paid on average 3.23 percent for its floating-rate, long-term debt, 70 basis points more than on its commercial paper, according to a company filing. |
