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Ten Stocks to Hold Long-Term - Barron's

I guess GE just confirmed loss of Triple AAA rating because of this...

GE Capital sets $8 bln, FDIC-backed debt sale -IFR
Mon Mar 9, 2009 12:57pm EDT Email | Print | Share| Reprints | Single Page[-] Text [+]
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More Business & Investing News... NEW YORK, March 9 (Reuters) - General Electric's (GE.N) finance unit, General Electric Capital Corp, plans to sell $8 billion in bonds backed by the Federal Deposit Insurance Corp, in a four-part sale, said International Financial Review on Monday.

The sale includes $4 billion in two-year fixed rate notes expected to price at around 8 basis points over mid-swaps and $1 billion in two-year floating rate notes expected to price at around 8 basis points over the three-month London interbank offered rate, said IFR, a Thomson Reuters service.

The sale also includes $1.5 billion of three-year fixed rate notes expected to price at around 20 basis points over mid-swaps and $1.5 billion in three-year floating rate notes expected to price at around 20 basis points over three-month Libor, IFR said.

Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and RBS Greenwich Capital are co-managing the sale. (Reporting by Karen Brettell; Editing by Leslie Adler)


NOW THAT...

What happens in a downgrade? The Fortune article presents a good summary:

On page 53 of GE's 2008 10k recently filed with the SEC, the company says that at the end of last year, if it had a rating of AA-, GE Capital would have been required to provide about $3.5 billion of capital to support a group of entities that are funded by issuing guaranteed investment contracts (GICs). A GIC provides a fixed return on an mount of capital that the GIC issuer invests.

Another entity at GE Capital also issues GICs and then loans the proceeds back to the finance arm. If GE Capital's rating were to hit AA-, GE Capital would have to provide about $4.7 billion to repay the GIC holders.

The total $8.2 billion GE would owe could swallow up the $4.2 billion freed up by the recent dividend cut as well as further weaken the company's cash holdings. In an environment where it's difficult to raise cash, that would put GE at risk of further ratings cuts - and more ratings cuts would cost the company even more money.

GICs can burn GE in another way. Should the liabilities in the GICs exceed their fair market value, GE Capital would have to provide the difference. As long as GE is not forced to sell these contracts, this should not be a problem. But had the company sold the GICs at the end of 2008, according to the annual report, the fair value of their assets were only $9.2 billion and the liabilities totaled $10.7 billion, which would make a loss of about $1.2 billion.

GE's annual report also says that if the rating on GE, or applicable entities, falls six notches to A-, then covenants will be triggered on its swap, forward and options contracts that force the company to pay money to its counterparties to account for the additional risk. The fair value of this risk was about $4 billion at the end of 2008, according to page 52 of the 10k.

A cut to its short-term debt rating would also be a blow to GE. Should GE's short-term debt ratings fall below A+ (or A1 in Moody's parlance), then it would no longer be eligible to participate in the Federal Reserve's Commercial Paper Funding Facility program.

GE currently has $60 billion in commercial paper outstanding, i.e. short-term loans that roll over every month or so. It is essential that these loans roll over - meaning that lenders continue to let GE borrow on a short-term basis - because these loans fund the company's daily operations.