Triple-A rated GE has long been considered as safe an investment as you can get–as safe as, say, houses. But last week’s emergency financing, which destroyed tens of billions of dollars of GE shareholder value, caused many observers to revise their opinion of the company’s risk profile. And language in GE’s most recent 8K should cause everyone to break out in a cold sweat.
As of June 30, GE had about $100 billion in short-term debt, the commercial paper that is becoming more and more expensive to issue. Commercial paper has to be rolled over everything three months or so. This means that, unless GE massively reduced its short-term debt load in Q3, the company will need to keep borrowing about $100 billion every three months. A bummer, then, that the commercial paper market has seized up.
The $15 billion in emergency equity capital that GE raised last week will take care of some of this problem, but only about 15% of it. So that leaves $85 billion that GE needs to borrow in short order (plus another $53 billion in the current portion of long-term debt).
A large portion of GE Capital’s borrowings have been issued in the commercial paper markets and, although GE Capital has continued to issue commercial paper, there can be no assurance that such markets will continue to be a reliable source of short-term financing for GE Capital. If current levels of market disruption and volatility continue or worsen, or if we cannot lower our asset levels as planned, we would seek to repay commercial paper as it becomes due or to meet our other liquidity needs using the net proceeds of this offering and the Berkshire Investment, by drawing upon contractually committed lending agreements primarily provided by global banks and/or by seeking other funding sources. However, under such extreme market conditions, there can be no assurance such agreements and other funding sources would be available or sufficient.
Wow, sounds scary. And it is. Especially compared to the language in the same Risk Factor in GE’s 10K, which was filed in February:
The major debt agencies routinely evaluate our debt and have given their highest debt ratings to us. This evaluation is based on a number of factors, which include financial strength as well as transparency with rating agencies and timeliness of financial reporting. One of our strategic objectives is to maintain our “Triple A” ratings as they serve to lower our borrowing costs and facilitate our access to a variety of lenders. Failure to maintain our Triple A debt ratings could adversely affect our cost of funds and related margins, liquidity, competitive position and access to capital markets.
Failure to maintain Triple A versus failure to…be able to borrow enough money to survive. Yes, definitely scary.
So, good thing the Fed just announced another massive bailout plan for the commercial paper market. Many tens of billions of that bailout money will probably be headed to GE.