GE, Goldman New Issue Comparison

Includes: GE, GS
by: Charles Margolis

The Goldman Sachs Group (NYSE:GS) and General Electric (NYSE:GE) Capital Corp. (NASDAQ:GECC) have just issued new senior debt. The notes just hit the secondary market and both sets are dated November 1, 2012.

General Electric Capital Corporation is wholly owned by General Electric Company. General Electric Capital Corporation conducts most of GE's financial services operations.

Both companies' new notes rank well below shorter-term notes that are trading at less than 10% of a premium. So new Goldman notes for 2032 currently have less yield than Goldman notes that mature in 2026. New General Electric Capital bonds, that mature in 2031, currently yield less than the company's bonds that mature in 2025.

BRK.A Debt to Equity Ratio Chart
(Click to enlarge)

BRK.A Debt to Equity Ratio data by YCharts

Both companies' debt to equity ratios have trended down since the 2008/2009 economic downturn. Check out how the two companies compare to Berkshire Hathaway's (NYSE:BRK.A) debt to equity ratio.

In the past two years, General Electric's net income (trailing 12 months) has outpaced Goldman's net income (trailing 12 months.) GE and Goldman's free cash flow (operating cash flow minus capital expenditures) has recently trended down. This appears consistent with Goldman's recent performance, however, it is inconsistent with General Electric's recent performance.

GE Free Cash Flow Chart
(Click to enlarge)

GE Free Cash Flow data by YCharts

In the chart below, the new issues are priced at 100.00, they are in bold. I have also added the bonds listed before and after the new issues on the secondary market.

coupon price yield
Goldman Sachs Grp Inc MTN Be Fr 5.25% 02/15/2026, Survivor Option, Mnthly Cpn (cusip: 38141E3A5) 5.25 108.50 4.404%
Goldman Sachs Grp Inc MTN Be Fr 4.4% 11/15/2032, Survivor Option, Mnthly Cpn (cusip: 38141EH85) 4.4 100.00 4.400%
Goldman Sachs Grp Inc MTN Be Fr 5% 12/15/2025, Survivor Option, Mnthly Cpn (cusip: 38141E4D8) 5.0 106.87 4.313%
Goldman Sachs Grp Inc MTN Be Fr 4.5% 02/15/2020, Survivor Option, Mnthly Cpn (cusip: 38141EL56) 4.5 106.09 3.550%
Goldman Sachs Grp Inc MTN Be Fr 3.5% 11/15/2023, Survivor Option, Mnthly Cpn (cusip: 38141EH77) 3.5 100.00 3.500%
Goldman Sachs Grp Inc MTN Be Fr 5.65% 07/15/2019, Survivor Option (cusip: 38141E6X2) 5.65 113.00 3.462%
Goldman Sachs Grp Inc MTN Be Fr 5% 10/15/2019, Survivor Option (cusip: 38141E7G8) 5.0 112.29 3.027%
Goldman Sachs Grp Inc MTN Be Fr 3% 11/15/2020, Survivor Option, Mnthly Cpn (cusip: 38141EH69) 3.0 100.00 3.000%
Goldman Sachs Grp Inc MTN Be Nt 7.5% 2019 (cusip: 38141EA25) 7.5 125.96 2.949%

Goldman and GE Capital's bonds are listed as call protected and have sinking fund protection. The current phenomenon of shorter-term bonds offering better deals than new issue bonds is interesting. Of course, the longer-term bonds should pay more fixed income over time, presuming Goldman and General Electric Capital do not default.

coupon price yield
General Electric Capital Corp Fr 4.3% 10/15/2025, Survivor Option (cusip: 36966TAJ1) 4.3 106.36 3.678%
General Electric Capital Corp Fr 3.5% 11/15/2031, Survivor Option (cusip: 36966TGV8) 3.5 100.00 3.500%
General Electric Capital Corp Fr 4.5% 02/15/2022, Survivor Option (cusip: 36966TBF8) 4.5 108.80 3.388%
General Electric Capital Corp Fr 4.5% 12/15/2022, Survivor Option (cusip: 36966TAX0) 4.5 109.72 3.359%
General Electric Capital Corp Fr 3% 11/15/2025, Survivor Option (cusip: 36966TGU0) 3.0 100.00 3.000%
General Electric Co Nt 5.25% 2017 (cusip: 369604BC6) 5.25 118.77 1.423%

Senior Debt/Subordinate Debt

Moody's rates Goldman's senior debt A3 and the company's subordinate debt Baa1. One consideration for smaller investors is Goldman's subordinate debt for higher yield.

credit rating price yield
Goldman Sachs Group Inc Sub Nt 6.45% 2036, Cond Call, Make Whole Call (cusip: 38143YAC7) Baa1/BBB+ 106.75 5.915
Goldman Sachs Grp Inc MTN Be Fr 5.75% 02/15/2037, Survivor Option, Mnthly Cpn (cusip: 38141E2Y4) A3/A- 107.58 5.200

Larger investors who want the added sense of security of their bonds being first in line, if the company defaults, might prefer senior debt. Keep in mind Goldman's senior debt is call protected, while the subordinate debt is not call protected.

Goldman's Investments

Some of the top companies Goldman Sachs invests in are unimpressive in my opinion. Goldman Sachs was also one of the earlier investors in Facebook (NASDAQ:FB), and is currently one of the top holders:

Shares owned by Goldman Sachs

(Beneficial Owner 10% or more)

Debt / Total Cash [mrq]
MRC Global (NYSE:MRC) 78.5M 1.36B / 39M
Cobalt International Energy (NYSE:CIE) 62.9M 0 / 1B
Educational Management Corporation (NASDAQ:EDMC) 54.3M 1.6B / 191M
Limelight Networks (NASDAQ:LLNW) 30.3M 2.9M / 124M
Dollar General (NYSE:DG) 24.3M 2.9B / 136.8M
Aeroflex Holdings (NYSE:ARX) 12.7M 641M / 41M
Griffon Corporation (NYSE:GFF) 10M 702M / 171M
Facebook 8.9M 700M / 10B

Dollar General and Facebook at least have brand recognition; however, companies like Education Management, which operates Art Institutes and for profit colleges, has had a series of problems. Likewise Aeroflex, a microprocessor company, is at a 52-week low.

Clearly, Goldman is not investing in the sorts of companies that Berkshire Hathaway gravitates towards [Wrigley, Coca-Cola (NYSE:KO) and IBM (NYSE:IBM) for instance.] If Goldman Sachs continues on the course of picking non-winners, it could mean the company will become even more distressed. Though it should be underscored that these eight companies do not represent Goldman's entire business.

GE and Goldman Credit

Moody's downgraded General Electric and General Electric Capital debt on April 2012.

Moody's Investors Service today downgraded the senior unsecured debt rating of General Electric Company to Aa3 from Aa2 and the senior unsecured rating of its wholly-owned finance subsidiary, General Electric Capital Corporation (GECC), to A1 from Aa2 ...

The downgrades result from the implementation of Moody's revised global rating methodology for finance companies, and reflect in particular the impact of GECC's higher risk profile on GE. Moody's believes the risk profiles of market-funded financial institutions, including GECC, are higher than was previously reflected in their ratings. While GECC has improved its liquidity and capital levels since the onset of the credit crisis, Moody's believes that, notwithstanding these positive steps, there remain material risks associated with the firm's funding model ...

This is disconcerting, and is one reason why I am cautious on General Electric and GECC, and do not actively acquire their debt. However, I am currently on the lookout for Goldman Sachs bonds. I am keeping the allocation at slightly less than 1% of the portfolio.

Moody's downgraded Goldman Sachs in June 2012:

The Goldman Sachs Group, Inc.

Long-term senior unsecured debt to A3 from A1, outlook negative; Short-term to P-2 from P-1

So, Goldman Sachs was just at the level GE Capital has been downgraded to. In my opinion, it is important to view the bond market relative to the performance of Goldman Sachs and GE/GECC. Compared to the Treasuries, these companies offer considerably more yield.

Here is an example layered position to consider using some of these bonds, a mutual fund and an income CEF:

Goldman Sachs 2025 5% GECC 2025 4.3% Mutual Fund Income CEF Total / %
$100,000 $2,150 $1,080 $2,500 $500 $6,230 / 6.2%
$1M $3,225 $2,160 $5,000 $750 $11,135 / 1.1%

Notice the mutual fund allocation works to balance the allocation into bonds, and the CEF acts as a supplement. It is interesting to consider the difference in amounts necessary to properly allocate to bonds, mutual funds and stocks.

The average yield of both 2025 bonds selected in this example is 3.95%, though the example pushes the yield up by weighting Goldman bonds. This example would experience greater weakness if Goldman Sachs' credit rating continues to dwindle or the company experiences a default.

10 Year Treasury Rate Chart
(Click to enlarge)

10 Year Treasury Rate data by YCharts

Let's look at two of the new GECC and Goldman Sachs notes, compared to the 10, 20 and 30-year Treasury rate. Notice the orange line, which is the 20-year rate, since these notes are approximately 20-year bonds:

Goldman Sachs Grp Inc MTN Be Fr 4.4% 11/15/2032, Survivor Option, Mnthly Cpn (cusip: 38141EH85) 4.4 100.00 4.400%
General Electric Capital Corp Fr 3.5% 11/15/2031, Survivor Option (cusip: 36966TGV8) 3.5 100.00 3.500%

The 20-year Treasury yield was 3.5% in late 2011 and near 4.4% in the middle of 2011. This illustrates the dramatic downturn the rates have taken. Now, consider the two 2025 bonds used in the example and compare their yields to the blue line, keep in mind these have approximately 12 years until maturity:

Goldman Sachs Grp Inc MTN Be Fr 5% 12/15/2025, Survivor Option, Mnthly Cpn (cusip: 38141E4D8) 5.0 106.87 4.313%
General Electric Capital Corp Fr 4.3% 10/15/2025, Survivor Option (cusip: 36966TAJ1) 4.3 106.36 3.678%

Both Goldman Sachs and GECC are issuing more debt, however, it is not as attractive as their older debt. The 2025 Goldman bonds' yield is similar to the 10-year Treasury rate in late 2007 (of course that was Aaa rated,) the GECC debt has a similar yield to the 10-year rate in early 2010. One strategy could be to save Goldman and GECC income to go back into U.S. Treasuries when rates go back up.

The old saying goes, all that glitters is not gold, and this certainly could hold true for Goldman Sachs. Both GECC and Goldman are offering competitive yields and features, though conservative investors should take note that nearer-term bonds provide equal or greater yield, presuming they do not default.

If you have any comments regarding new and old Goldman Sachs and GECC debt, please leave a comment below.

Disclosure: I am long 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. I am long Goldman Sachs and GECC corp. bonds. I am considering Goldman Sachs 2036 subordinate debt. This article is not a recommendation to buy or sell. It is important to consult a financial adviser in order to determine proper allocations (if any) for your financial objectives.