By Rachel Layne
July 28 (Bloomberg) -- General Electric Co. said financial- regulation measures being debated in Washington are “increasingly unlikely” to force a separation of the GE Capital unit from the parent company.
GE won’t need to raise outside capital, executives repeated today to investors during a Webcast review of GE Capital, and credit default swaps to protect against a default by the finance unit dropped to a 10-month low. Provisions for potential losses should peak in 2010, setting the stage for improved earnings, executives said.
“We’re consistently hearing from people that we shouldn’t be breaking up successful institutions when they weren’t the cause of the crisis,” General Counsel Brackett Denniston, who said he was in Washington yesterday to get an update, told investors. “This forced breakup idea is increasingly unlikely to be adopted as part of this total” reform package.
Proposals that some analysts have said might prompt the separation of the finance unit are beginning to wind through Congress as a part of President Barack Obama’s financial- regulations package.
“Saying that the risk of a spin or sale has declined is clearly a positive,” said Joel Levington, an analyst at Hyperion Asset Management in New York.
GE rose 20 cents to $12.52 at 2:30 p.m. in New York Stock Exchange trading. Bonds rose, and credit-default swaps fell 35 basis points to 305 basis points, a 10-month low, according to broker Phoenix Partners Group.
Economic Scenarios
The parent company has lost about 55 percent of its market value in a year, punished by investors concerned that the finance arm may harbor potential losses in real estate and consumer divisions.
The finance arm is performing at or better than metrics pegged to the Federal Reserve’s base-case stress scenario, GE Capital Chief Executive Officer Michael Neal told investors. The division won’t need outside funds even under the Fed’s “adverse case” on the economy and should perform at similar levels in 2010, the company said in its presentation.
“We believe funding and liquidity have dramatically improved and the future is manageable,” Neal said. “Our portfolio is performing as forecasted -- in most cases better than the Fed base case” for the economy as GE outlined at a March 19 meeting.
GE Capital in 2010 should be profitable in “similar ranges” to 2009 estimates, GE Chief Financial Officer Keith Sherin told investors during the call. The effects of tax rates and credits in 2010 should be similar to 2009 in part because any legislation to change taxation is unlikely to take effect next year, he said.
GE Capital Outlook
Under the base case, GE Capital is forecast to earn about $2 billion to $2.5 billion this year and still be profitable under the “adverse” case. The company, which doesn’t provide per-share forecasts, instead gives a framework for earnings.
Provisions for potential losses should peak in 2010, Chief Risk Officer James Colica said on the call, “unless we get surprises.” As economic and financial market conditions improve, a reduction in additions to those provisions will help the bottom line, Sherin said.
Losses and impairments should slow to $12.1 billion in 2010 under the base case from $13 billion this year, while under the adverse case, losses could reach $17.5 billion from $16.9 billion in 2009, the company said.
Shrink the Business
Executives aren’t contemplating a larger joint venture for all of GE Capital, Sherin and Neal repeated in response to a question from analysts about speculation over the potential divestment of partial ownership to a bank. They instead are concentrating on shrinking assets and slowing businesses in areas including real estate and some consumer finance.
GE Chief Executive Officer Jeffrey Immelt is shrinking the finance arm to less than 30 percent of the parent’s total profit. Profit at the finance arm declined 80 percent in the second quarter as the first global recession since World War II slashed consumer spending and real estate markets collapsed, the company said earlier this month.
The finance arm supplied $8.6 billion of the parent company’s $18.1 billion in profit last year. The unit is shrinking its asset base to $400 billion to $450 billion from about $637 billion at the end of last year. GE Capital had about $557 billion in assets at the end of the second quarter.
GE Capital is the world’s biggest non-bank finance company with operations that span commercial real estate, credit cards, large-equipment leasing including aircraft and railcars, as well as lending to middle-market companies.
Commercial Paper
GE Capital has reduced its commercial paper balances to $50 billion from $74 billion at the beginning of the year, ahead of schedule. GE repeated today it had refinanced all $45 billion of the longer-term debt it plans to issue this year and completed about $18 billion, or 45 percent, of the amount it plans to do in 2010. No year going forward is likely to include more than $40 billion in long-term issues, Treasurer Kathryn Cassidy said.
The FDIC granted permission for a plan to withdraw from the insurance program, called the Temporary Liquidity Guarantee Program, or TLGP, GE said last week. GE Capital will stop selling insured commercial paper with a term of up to 270 days and will retain the ability to issue up to $14 billion more in insured bonds. The program expires Oct. 31.
Even if the program is extended, GE doesn’t intend to use it again, Sherin said today.
Capital Needs
GE last year sold $3 billion in preferred shares to investor Warren Buffett’s Berkshire Hathaway Inc. and some $12 billion in common shares to help bolster capital.
Under the agreement for capital support of the finance unit by the parent, GE doesn’t currently see a need to add more to GE Capital in 2010. The company may require internal injections of $2 billion under the base case in 2011 and $7 billion under the adverse case, based on current ratios, Sherin said.
“This is going to be determined in the future, but at least it gives you a look at ranges for potential infusions,” Sherin said.
GE Capital has a tier one capital common ratio of 7.4 percent compared with the 4 percent required with a capital buffer of $20 billion, Sherin said. The company has increased tangible equity in the first half of this year by $11 billion and it stands at $41 billion, he said.
GE Capital’s $1.5 billion of 5.4 percent notes due in 2017 rose 0.19 cent to 95.96 cents on the dollar to yield 6.08 percent, or 238 basis points more than Treasuries due in 2019, at 8:59 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities have dropped 2.3 percent since July 13.
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