GE Wins FDIC Insurance for Up to $139 Billion in Debt (Update3)
By Rachel Layne and Rebecca Christie
Nov. 12 (Bloomberg) -- General Electric Co. said the U.S. government agreed to insure as much as $139 billion in debt for lending arm GE Capital Corp., the second time in a month it has turned to a federal program designed to help companies during a global credit crunch.
Granting GE Capital, which isn’t a bank, access to a new Federal Deposit Insurance Corp. program may reassure investors and help the unit compete with banks that already have government protection behind their debt, said Russell Wilkerson, a spokesman for the Fairfield, Connecticut-based company. Coverage would be for about $139 billion, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.
“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Wilkerson said. GE sent investors an e-mail about the program today and posted the letter on its Web site. “Our participation is a positive development for our investors.”
GE’s finance businesses are able to seek FDIC debt coverage because its GE Capital subsidiary also owns a federal savings bank and an industrial loan company, both of which already qualify. GE last month started using a new Federal Reserve program designed to revive demand for commercial paper amid the global crisis.
The company’s exposure to the deepest global financial crisis since the 1930s has cut its market value by more than half this year, as Chief Executive Officer Jeffrey Immelt twice lowered his target for 2008 profit. GE fell $1.52, or 8.5 percent, to $16.29 at 4:15 p.m. in New York Stock Exchange composite trading amid a broad decline in U.S. stocks. The shares are at their lowest level since January 1997.
Increased Confidence
Credit default swaps on GE Capital, which rose in London earlier today, dropped 21 basis points to 391 basis points in New York, CMA Datavision prices show. A decline suggests an increase in investor confidence. GE Capital’s 5.625 percent notes due in 2018 jumped 2.2 cents on the dollar to 89.9 cents, the highest since September, for a yield of 7.1 percent as of 4:26 p.m. in New York, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service.
U.S. regulators introduced the FDIC program Oct. 14, making the insurance automatically available for banks on debt issued through June 30, 2009. Affiliated non-bank units have to apply separately, as GE did. Like the banks, GE would pay a premium for the insurance. GE said the coverage would begin on or before Nov. 14 and lasts through June 30, 2012.
‘Every Opportunity’
“If you’re a GE shareholder you’d be a fool not to want them to take advantage of every possible opportunity out there,” Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which oversees 6.12 million GE shares, said today. “By the same token there are far more pressing situations at companies that would be beneficiaries of taxpayer generosity. Should we really be expending here?”
The FDIC would gain the right to examine GE’s other finance units as a condition of participation. GE’s bank units already are regulated by the Office of Thrift Supervision. The program doesn’t require the U.S. to take a stake in GE, the e-mail said.
GE Capital, which carries the highest-possible AAA credit rating, includes divisions that are among the world’s largest lenders in commercial real estate, aircraft leasing and private- label credit cards. It also provides financing to help companies emerge from bankruptcy protection and so-called middle-market financing, or loans to smaller and midsized companies.
The unit makes money partly by taking advantage of the spread between the cost of debt it issues and the loans and finance contracts it writes.
FDIC’s Terms
GE’s finance divisions accounted for about half of sales and profit last year, and Immelt has said that percentage may shrink to about 40 percent in 2009. GE said Oct. 10 it still expects profit from the units to be about $9 billion this year.
U.S. regulators expanded the coverage last month after a similar move by European regulators to ease inter-bank lending. The insurance is offered through the FDIC’s Temporary Liquidity Guarantee Program, which also includes expanded deposit coverage for business checking accounts. It guarantees all new senior unsecured debt issued between Oct. 14 and June 30, 2009, up to a cap set for each institution when it signs up.
“All participants are on notice under the terms of the regulation that the FDIC reserves the right to expand their oversight,” Louis Crandall, chief economist of Wrightson ICAP in Jersey City, New Jersey, said of the federal program.
The FDIC so far is taking an all-or-nothing approach on the terms of participation. Banks are automatically enrolled, unless they opt out. If a bank holding company joins, all of its banking subsidiaries must also join. Program terms apply to all commercial paper, promissory notes and other eligible debt.
GE Capital Debt
According to its Oct. 10 presentation to investors, GE Capital Services had $536 billion in debt at the end of the third quarter. Of that, commercial paper, or debt due in nine months or less, was $88 billion, or 17 percent. The company issues debt in 18 currencies, with about 60 percent in non-U.S. denominations.
GE Capital has about $81 billion in long-term debt maturing between now and the end of 2009, according to another Oct. 10 chart. Of that, $43 billion comes due by June 30.
GE is already among companies using a new short-term funding facility from the Federal Reserve opened to revive demand for commercial paper, the short-term borrowing that companies use to finance day-to-day operations. GE and its finance entities, top- rated issuers, had issued paper without interruption before tapping the facility.
Fee Structure
Banks have until Dec. 5 to decide whether to opt out of the FDIC program. If they do, they’ll have to start paying premiums for the coverage, which lasts until June 30, 2012. For now, all FDIC-insured banks are automatically covered at no cost.
In general, participating companies “will be charged an annualized fee equal to 75 basis points multiplied by the amount of debt issued, and calculated for the maturity period of that debt or June 30, 2012, whichever is earlier,” according to the FDIC interim regulation. The regulation also says no fees will be charged during the first 30 days of the program, and it includes several options for calculating the insurance premiums.
The FDIC now is in the process of revising its interim regulation in response to comments, so the final fee structure may be different.
Andrew Gray, a spokesman for the FDIC, wasn’t immediately available for comment.
To contact the reporters on this story: Rachel Layne in Boston at rlayne@bloomberg.netRebecca Christie in Washington at rchristie4@bloomberg.net
Last Updated: November 12, 2008 18:36 EST
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(brief editorial note from JP: you may be wondering how they came up with the date of June 30th, 2012 for the calculation of the new bank FDIC insurance premium.... I guess they figured that with Martin Armstrong's concerns after 2011 and the Mayan calendar scheduling the end of the world for 2012, that was the logical end date to use -g- ( this is hopefully, a joke)
JP |
