Investors’ discomfort with General Electric’s exposure to a haemorrhaging financial services industry deepened on Monday after an analyst raised concerns that the conglomerate might need to inject more equity in its GE Capital division.
GE shares have dropped for three straight days and trade at a level unseen since 1995.
On Monday the cost of insuring against GE Capital’s debt against default neared a record high reached in October, when Wall Street was reeling from the Lehman collapse and the federal bailout of AIG.
Nigel Coe, an analyst with Deutsche Bank, cut his target price for GE to $12 from $17 while casting doubt on the group’s $5bn forecast for GE Capital’s 2009 earnings.
The shortfall might leave GE Capital in violation of a fixed charge covenant on its debt, forcing its parent to contribute more cash to the finance arm or pay down its debt, Mr Coe said.
GE has diverted all $15bn of the proceeds from last year’s stock sale to GE Capital to help reduce its leverage ratio ahead of schedule.
“In essence, this is the linchpin that binds GE and GE Capital together in the minds of debt investors,” he wrote to clients on Sunday.
GE’s shares in New York dropped 5.7 per cent to $8.85 on Monday. The cost to protect $10m in GE Capital debt against default for five years rose 100 basis points to 630 basis points, or $630,000 a year, according to Phoenix Partners Group. The default swaps had surged to 648 basis points in October.
Mr Coe, whose note came after a review of GE’s 10-K filing with US regulators, is not alone in questioning whether GE Capital can approach its profit target this year. Concerned with looming losses from real estate and other assets in GE Capital’s portfolio, many investors predict the downturn will cost GE both its credit ratings and its $1.24-a-share annual dividend.
The group responded to last year’s turbulence by cutting dependence on GE Capital for earnings, shrinking borrowing needs, slashing costs and participating in government programmes to stimulate liquidity.
It is raising more funds from deposits to help become less reliant on commercial paper, and while agreeing to leave its quarterly dividend unchanged, GE said its board would review the level of the pay-out for the second half of 2009.
“There’s a real focus on ‘safe and secure’, from a cash, liquidity and cost perspective,” Keith Sherin, GE’s chief financial officer, said this month.