General Electric’s financial-services arm, which has dodged the brunt of the credit crunch by shunning US mortgages and other risky assets, is extending its push into corporate and commercial real-estate debt to capitalise on the dearth of rival lenders in these markets.
The shift comes as the financial services industry grapples with a crisis that has toppled some leading institutions and raised doubts that even corporate behemoths such as GE can survive unscathed.
GE Capital, which accounts for more than half of the group’s profit, aims to replicate the success it had in acquiring distressed commercial assets from Merrill Lynch and Citigroup earlier this year, especially in Europe and Asia.
“We believe there will be some attractive opportunities in this market – not just in the US, but in the other parts of the world,” Michael Neal, GE Capital’s chairman and president, told the Financial Times. “We are looking.”
One asset that will remain free of Mr Neal’s grasp is International Lease Finance Corp, a unit of American International Group and GE’s biggest rival in aviation finance. While the US government’s bail-out of AIG could make ILFC a tempting, and attainable, target, a deal would double a portfolio already numbering almost 1,500 aircraft and leave GE Capital too dependent on the aviation industry.
The business is also shifting a bigger slice of its $87bn real-estate portfolio to debt from equity investments, which have become harder to sell this year as the capital markets seized up. GE fell short of its first quarter earnings forecast, in part because its real-estate business could not find buyers for some properties in late March following the Bear Stearns collapse.
Mr Neal’s division plans to allocate 70 per cent of its commercial real-estate portfolio to debt, up from 60 per cent. Nevertheless, sluggish demand will leave GE Capital’s balance sheet larger than its executives would like. By the end of June, assets were up 17 per cent from a year earlier.
Last week, GE’s shares fell and the cost of insurance on its debt soared amid concern that the latest turmoil would cost GE Capital access to short-term loan markets despite the company’s sterling credit ratings.
GE Capital’s 15 commercial-paper programmes raise as much as $95bn. Mr Neal said he had grown concerned with the health of money-market investment funds, which buy a large chunk of GE’s paper. But the US government’s proposed rescue plans may alleviate those risks, he said.