A few days ago, we wrote about the bomb blowing up in GE’s hold ($90 billion of short-term commercial paper, a market that until the latest Fed bailout was outrageously expensive). GE was kind enough to assure us that, in fact, it has been able to roll over plenty of paper at reasonable prices in recent weeks. We assume that the Fed commercial paper bailout will only make this situation better.
We currently have around $90B of commercial paper. Even in this tough environment, we have been overfunded every day for the last two weeks… at rates that are well below Libor and at or below the average Fed Fund rate.
Last week’s investment from Buffett and the secondary gave us $15 billion of additional liquidity. This cash will sit at the parent, and will give us flexibility to help on funding IF the markets deteriorate, and if not, then we can play offence. When you add this amount to the $62 billion bank lines and cash on hand, we now have more than enough liquidity to cover our CP exposure (~$90B). Again, these are proactive steps taken in case we ever need it. The Fed [commercial paper bailout] announcement… is an important development that will help improve confidence in the CP market and facilitate more lending. It will help all issuers and purchasers of CP.
…Our CFO mentioned on our September 25 call that there has been a flight to quality benefiting our paper. The volatility in the Fed funds rate has been a recent influence on pricing as has the spike in LIBOR, but the affect on our entire CP portfolio is not significant. We issue our CP directly (no brokers) in 11 currencies. Also, we match fund, so we hedge our interest and currency risk over time.
The only concern there is the part about the spike in LIBOR having an impact. GE obviously doesn’t have to roll over the entire CP portfolio overnight, so of course only a small percentage of it has currently been affected.
LIBOR started spiking after Lehman went bust–about three weeks ago. Assuming GE’s commercial paper portfolio has an average three-month maturity, that would suggest that about 25% of it has been affected. The market has only really tightened in the past week or two, however. So the percentage may be smaller than that.)
The question now is whether the Fed’s Commercial Paper program will ease pricing in the private market. Has it already done this? Any Commercial Paper buyers out there care to weigh in?
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