General Electric shares fall on fears over capital unit
By Ed Welsch, Feb. 23, 2009
("General Electric Shares Fall On Fears Over GE Capital Unit," published at 12:17 p.m. EST, incorrectly reported GE shares had reached a 15 year low in the first paragraph. The correct version follows.)
NEW YORK (MarketWatch) -- Shares of General Electric Co. fell to their lowest level in 14 years Monday as investors were spooked by reports highlighting the potential for greater losses in its financial unit.
GE shares fell 6% to $8.82 Monday morning, following a price target cut by a Deutsche Bank analyst who said there's a growing risk that GE will have to cut its dividend to support its GE Capital financial unit.
The rapid buildup of unrealized losses in GE Capital's balance sheet may endanger GE Capital's profitability and its ability to pay its debt holders, Deutsche Bank analyst Nigel Coe said in a research note Monday.
Investors continued to show a strong level of fear over GE Capital's ability to meet its debt obligations Monday morning, as the cost to insure GE Capital's debt traded at a very high level of 510 basis points, meaning it would cost $510,000 to insure $10 million in debt for five years. In comparison, the cost to insure Citigroup Inc.'s (C) debt was only 425 basis points.
Coe said unrealized losses on GE Capital's $436 billion balance sheet increased to $21.2 billion at the end of 2008 from $5.1 billion at the end of 2007.
"The pace of deterioration is stunning as it is clear, even to a layman, that conditions are not getting any better," Coe wrote.
By extrapolating GE Capital's current loss trend line, Coe estimated that losses could reach between $40 billion and $50 billion this year.
A General Electric spokesman said it was the company's policy not to comment on analyst research.
While GE Capital's assets aren't marked to market every quarter like some financial firms, Coe said the risk of GE Capital having to recognize the losses will likely grow through 2009 as the unrealized losses widen.
Higher losses and difficult credit conditions may also cut into GE Capital's earnings this year, Coe said. He estimates that GE Capital will earn $2.3 billion this year, less than half the $5 billion target set by management.
A lower level of earnings would put GE Capital in danger of not being able to make interest payments on its debt, Coe said, which would force GE to either contribute money so GE Capital can make its debt payments, or to pay off some of the principal amount of GE Capital's debt to allow it to be able to meet future debt payments with lower earnings.
The extra cost to GE of paying down its financial unit's debt would make GE's dividend "highly vulnerable to a material cut as early as 3Q09," Coe wrote.
Coe said he believed GE Capital still has a "tremendous long term earnings potential," but he said he had to assume a GE Capital value at zero until there were more indications that its long-term value would exceed its near-term capital requirements. Coe said the zero valuation is the primary factor behind lowering his price target on GE shares to $12 from $17.
Also Monday, the Wall Street Journal reported in its "Heard on the Street" column that GE Capital's portfolio of commercial real estate losses and its international residential mortgages could be a source of more losses and loss reserves. The Wall Street Journal is owned by News Corp. (NWS), which is also the publisher of this newswire.
http://www.marketwatch.com/news/story/...B1C9-430E-9F67-299D953D5CD4}
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