Tuesday, February 10, 2009

GE Provides GE Capital With New $9.5 Billion Injection

Adding to today's bad news, GE's CFO Keith Sherin announced that the company transferred $9.5 billion in cash from to GECC as Moody's is currently evaluating the finance unit for a possible downgrade. Shering said the transfer lowered the division's leverage ratio from 7x in the fourth quarter to the 6x pro forma for the injection. What is concerning is that GECC, which is currently AAA rated by Moody's, also has full access to the Fed's Commercial Paper Funding Facility (CPFF) and the FDIC's Temporary Liquidity Guarantee Program (TLGP), and these seem to not be sufficient to provide the near term breathing room the company needs. Furthermore, GECC has been troubled by holding a very large book of illiquid credit investments and other arcane assets, as together with CIT, it was the largest provider of rescue financing over the boom years. Now that many of those companies are on the verge of chapter 11 or outright liquidation, its asset pool is rapidly diminishing in value. In terms of its shaky capitalization, GECC ended 2008 with $36 billion in cash, had a prior cash injection from GE of $5.5 billion and has planned term debt issuance of $45 billion.

Lastly, Moody's used the following cautionary language when it presented the case for a potential downgrade:
Moody's also notes that GE's industrial businesses retain strong competitive positions, and should demonstrate improved performance once the economy rebounds. Additionally, the company's $172 billion of infrastructure equipment and service backlog provides important visibility into future revenue. Recent initiatives to reduce costs and enhance cash flow generation should also help to support near term operating performance.

"Nevertheless, the global economic downturn and continued tight credit market conditions create some strong headwinds for the company's long cycle Energy, Aviation, Transportation, and Healthcare businesses," said Moody's Lane. "Reduced order flow and deferral or cancellation of existing orders could be a more significant concern in the coming year."

Performance of the company's short cycle businesses (appliances, lighting, and local television stations) continue to exhibit weakness and could see greater earnings erosion during 2009. The impact of these short cycle businesses on GE industrial's overall performance, however, should be modest as they represent less than 5% of industrial operating profit.
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