Fund Manager Gross Lashes Out At GE Over Disclosure, Debt Load
By GREGORY ZUCKERMAN and RACHEL EMMA SILVERMAN
Staff Reporters of THE WALL STREET JOURNAL
March 21, 2002
The bond king is taking on one of the biggest players in the corporate-bond market.
In an unusual public rebuke, Bill Gross, manager of the world's biggest bond fund, lashed out at General Electric, saying the company is carrying too much debt and isn't dealing honestly with investors. Bond investors, he said, suffered a particularly steep loss in recent days after GE's financial unit, GE Capital, announced it might sell as much as $50 billion in bonds, only days after investors bought $11 billion of new bonds in the biggest U.S. sale in history.
The slap is notable in part because it marks the first time Mr. Gross, whose $250 billion under management and stellar track record make him the bond world's Warren Buffett, has so aggressively gone after a blue-chip name.
But it also could cause headaches for GE: In an interview, Mr. Gross said the mutual-fund giant that he heads, Pacific Investment Management, dumped $1 billion in GE commercial paper in recent days. If other companies follow Pimco's lead -- as is sometimes the case -- GE's borrowing costs could go up, hurting its bottom line.
"The corporation's honesty remains in doubt," said Mr. Gross, in a report circulated to Pimco investors. He said GE Capital's foundation is "vulnerable" because it depends on the confidence of investors to keep its financing costs low.
Mr. Gross's critique helped send shares of GE down almost 3%, and added to the recent complaints among some investors that the conglomerate isn't being forthcoming enough about its balance sheet and how it has been able to boost earnings.
In response to Mr. Gross's claims, Keith Sherin, GE's finance chief, said, "We have a world-class business. We think we operate it pretty effectively."
But Mr. Gross said GE Capital has commercial paper outstanding adding up to three times the size of the company's lines of credit with its banks -- an unusually high ratio that could signify added risk for investors. "GE Capital is using near-hedge fund leverage" not consistent with the triple-A rated debt of the world's largest company, Mr. Gross said.
Mr. Sherin acknowledges GE's deep reliance on short-term debt, but says the company is trying to rebalance its portfolio with increased long-term debt offerings. "Our plan to rebalance the debt is to issue more long-term debt, increase our bank lines, and the rating agencies have agreed to our liquidity plans," he said. "We are a triple-A and we have the highest short-term ratings." He said GE would like to reduce its reliance on short-term financing to between 25% to 30% of its debt total, from 49% last year. Mr. Gross said GE Capital undertook its recent big bond deal not because rates were low, but because GE was worried about running into problems in the commercial-paper market, where it has long been able to sell short-term debt to investors at super-slim rates.
If those rates rise, the engine that is helping to drive GE's earnings could stall out, Mr. Gross argues.
He said GE "grows earnings not so much by the brilliance of its management," but by selling debt at cheap rates, and using stock for acquisitions. "Pimco will not own GE commercial paper in the foreseeable future."
Mr. Sherin countered that GE "did communicate to investors last week that there were other reasons for the debt ... I apologize to investors if they thought we timed the absolute bottom of the market." Moreover, only about $200 million of GE's earnings growth in 2001 was from acquired operations, or about 15% of overall earnings growth of $1.4 billion, Mr. Sherin said. Of its roughly 100 acquisitions last year, only three were funded using GE stock, he added.
GE Capital had $127 billion in short-term debt as of March 11, making it the largest issuer in the world of commercial paper, according to a recently released assessment by Moody's Investors Service.
Pimco has reduced its longer-term GE bond holdings to $50 million of its $250 billion portfolio.
Mr. Gross also counts himself among the analysts who have started to wonder how GE has been able to consistently beat Wall Street's earnings expectations. He said John F. Welch Jr., former chief executive of GE, and his successor, Jeffrey Immelt, haven't been "totally forthcoming in the explanation for why GE has been able to grow earnings by nearly 15% per year for the last several decades."
"I didn't mean to pick a fight with GE, this is probably the first time I've criticized a company," he said.
Treasurys
Treasury prices ran up against technical barriers and plunged.
The bailout in government bonds was "cataclysmic" as reasons to sell, including market speculation about the Federal Reserve's next move and a strong housing starts report, probably collided with a technical trigger, said Sadakichi Robbins, head of global fixed-income trading at Bank Julius Baer in New York.
At 4 p.m. New York time, the benchmark 10-year Treasury note was down 24/32 point, or $7.50 per $1,000 face value, at 96 5/32. Its yield rose to 5.380% from 5.279% late Tuesday, as yields move inversely to prices.
Meanwhile, the 30-year Treasury bond's price was off 1 4/32 at 93 29/32 to yield 5.812%, up from 5.731% on Tuesday.
Though Treasury prices tested their lows from Friday, they didn't breach any key points, though the two-year note's yield bounced around the critical level of 3.67%, Mr. Robbins noted.
The Federal Reserve shifted on Tuesday to a balanced view of inflation and weak-growth risks, and now the bond market must start weighing possibilities for the next Federal Open Market Committee meeting, scheduled May 7.
With the Fed's stage set for an interest-rate increase, market participants will scrutinize economic data and focus on Fed utterances between now and then. Treasurys will become more vulnerable to selling if more data point to economic strength and more market watchers predict the Fed will raise rates soon, analysts said.
Among pressures on Treasury prices was the morning's report that U.S. housing starts climbed 2.8% to a seasonally adjusted 1,769,000 annual rate, their highest level since December 1998.
Government bond prices lost some ground immediately after the housing report, then steepened their slide later in the morning session amid dealer-led selling of short-dated cash Treasurys and futures, traders said.
Inflation concerns probably helped fuel the selloff, said Corey Redfield, chief fixed-income strategist at US Bancorp Piper Jaffray in Minneapolis.
A sharp rise in the price of crude oil to more than $25.50 a barrel, the highest level since late September, was yet another bond-negative factor, he noted. Longer-dated bonds are especially vulnerable to any growth of price pressures.
Corporate Bonds
The investment-grade corporate-debt market has seen a steady stream of new-issue supply; more than $2 billion hit the primary market.
The largest deal of the day came from Devon Energy, of Oklahoma City, which sold $1 billion of 30-year debt through joint bookrunners Banc of America Securities and UBS Warburg. The issue was priced to yield 7.995%, or 2.2 percentage points over comparable Treasurys.
Here are the results of Tuesday's Treasury auction of four-week bills. The table was inadvertently dropped from Wednesday's paper. All bids are awarded at a single price at the market-clearing yield. Rates are determined by the difference between that price and the face value.
Applications $33,310,349,000
Accepted bids $19,000,129,000
Accepted noncompetitively $21,071,000
Accepted frgn noncomp $0
Auction price (Rate) 99.862 (1.780%)
Coupon equivalent 1.80%
Bids at market-clearing yld accepted 75%
Cusip number 912795JQ5
The bills are dated Mar. 21, and mature Apr. 18, 2002.
MBNA tapped the high-grade market for $500 million of 10-year notes. The issue was priced to yield 7.591%, or 2.2 percentage points over Treasurys. Deutsche Bank Alex. Brown and Lehman Brothers Inc. had the books on the issue.
Meanwhile, the high-yield corporate bond segment continued to heat up, with two increased-in-size deals hitting the market. Foamex International sold $300 million in seven-year senior secured notes through lead managers Credit Suisse First Boston Corp. and Salomon Smith Barney Inc. The deal was increased from $200 million. The notes offer a yield of 10.75%.
Dresser also was able to increase to $250 million from $200 million its add-on of 9.375% senior subordinated notes due 2011. The deal, whose lead managers were Morgan Stanley and Credit Suisse First Boston Corp., sold with an 8.888% yield.
Also, price talk emerged on deals slated for later in the week.
Wolverine Tube's proposed $115 million offering of seven-year senior notes, scheduled to sell Thursday or Friday via Credit Suisse First Boston and Wachovia Securities, should yield between 10.75% and 11%, say market participants.
Initial price talk on Avaya's $300 million offering of seven-year senior secured notes suggests a yield of 11.25% to 11.50%. The deal is expected Friday through lead managers Credit Suisse First Boston and Salomon Smith Barney.
Details also emerged on a $200 million offering by Isle of Capri Casinos. The 10-year senior subordinated notes are expected to sell later Thursday via joint bookrunners Dresdner Kleinwort, CIBC World Markets and Deutsche Banc Alex. Brown, according to MCM CorporateWatch. Price talk was given as an 8.625% to 8.875% yield.
-- Christine Richard, Jennifer Downey, John Parry and Richard Bravo contributed to this article.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Rachel Emma Silverman at rachel.silverman@wsj.com |
