General Electric: Was That A Run On The Bank?

Dec. 01, 2018 1:28 AM ETGeneral Electric Company (GE)280 Comments
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  • When GE had to abandon the commercial paper market, it may have been equivalent to a "run on the bank"
  • GE's funding costs have spiked. This could punish GE Capital which has a $16 billion loan portfolio and a $70 billion debt load.
  • Rising funding costs could amplify losses at GE Capital and/or make it difficult to sell the portfolio at a price GE could live with.
  • Once rating agencies or investors parse through the potential black hole at GE Capital, it could punish GE's share price.
  • Sell GE.
  • Looking for more? I update all of my investing ideas and strategies to members of Shocking The Street. Get started today »

GE LightbulbSource: Forbes

Earlier this month, General Electric (NYSE:GE) abandoned its use of commercial paper:

Once the largest borrower in the market, GE Capital is abandoning its use of commercial paper - debt with a maturity of up to 270 days. The move could add to its cost of financing, which is already under upward pressure after downgrades to the company's credit rating. GE's financial services division is instead becoming more reliant on bank lending and had available net credit facilities of $40.8B at the end of September.

I knew it was one of the biggest borrowers of commercial paper during the Financial Crisis. I also knew GE's cost of funding would rise, but did not attempt to estimate the impact. Having its commercial paper pulled might have been the first signs of a run on the bank. It could also raise questions as to why GE would have $16 billion in loans backing $70 billion in debt. This could be devastating for GE.

The Situation

In October, Moody's downgraded GE's senior unsecured debt two notches from A2 to Baa1. The company's bond yields and cost of funding have spiked since the downgrade and the loss of its commercial paper program. Peter Tchir of Academy Securities argued the market's fears about GE's bonds are overblown since about $26 billion of GE's debt load was maturing in the next two years, mostly in 2020.

However, rising funding costs will likely have an immediate impact on GE Capital, the company's financing arm. At Q3 2018, GE Capital had assets of $129 billion, of which about $16 billion was related to loans and commercial mortgages. Another $37 billion was in cash and investment securities likely related to its $36 billion of insurance contracts.

GE Capital Q3 2018 Balance Sheet

GE Capital had short-term borrowings, non-recourse loans, and long-term borrowings totaling $70 billion. I assumed $16

This article was written by

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The Shock Exchange has a B.A. in economics and MBA from a top 10 business school. He has over 10 years of M&A / corporate finance experience. Currently head the New York Shock Exchange, financial literacy program based in Brooklyn, NY.His book, "Shock Exchange: How Inner-City Kids From Brooklyn Predicted the Great Recession and the Pain Ahead", predicted pain ahead for the U.S. economy and financial markets.In 2014 the law firm of Kirby, McInerney, LLP brought a class action lawsuit against Molycorp, Inc. for "materially misleading statements" in its financial statements. Kirby, McInerney used investigative journalism from the Shock Exchange to buttress its case. That's the discipline the Shock Exchange brings to every situation he covers for SA.

Disclosure: I am/we are short GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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