GE wins U.S. approval to exit TARP program
By Scott Malone
BOSTON, July 22 (Reuters) – General Electric Co has received approval to step back from a U.S. government-backed debt program, a change that the largest U.S. conglomerate said will allow it to issue some debt more cheaply.
GE said on Wednesday that the Federal Deposit Insurance Corp gave the nod to its plan to exit the Temporary Liquidity Guarantee Program, which was set up to keep markets operating during the worst of last fall’s credit crisis.
GE Capital will stop issuing commercial debt backed by the government as a result of the move and will gain the right to issue bonds maturing before Dec. 30, 2012 outside of the program. A spokeswoman said the move will allow GE to raise money in the bond markets more cheaply.
The FDIC will lower its available credit limit to GE under the program to $75 billion from $126 billion. GE has issued about $12 billion in debt not backed by the government since November.
The news comes as GE Capital’s smaller rival CIT Group Inc flirts with bankruptcy and GE management faces the threat that the Obama administration’s proposed overhaul of the U.S. financial regulatory system could force it to spin off the finance arm, which has businesses ranging from investing in commercial real estate to financing sales of heavy equipment made by its parent.
GE has “already gotten the benefit out of the program and this indicates a sign of confidence from the company about its funding needs for next year,” said Steven Winoker, senior analyst at Bernstein Research. “Why subject yourself to the negative image of … a government program, as well as the uncertainty of whether the program will be extended?”
GE shares rose 13 cents to $11.60, 1.1 percent, on the New York Stock Exchange.
An FDIC spokesman confirmed GE’s application to pull back from the program was approved, but declined further comment.
The TLGP program is due to expire in October. Major financial institutions including Bank of America Corp , JPMorgan Chase & Co and Citigroup Inc have all issued tens of billions of bonds through the program.
“Today’s plan to exit from TLGP affirms the strength of GE Capital’s funding and liquidity position, including reduced reliance on government funding programs and our ability to access nonguaranteed debt markets,” GE Treasurer Kathryn Cassidy said in a statement.
The Fairfield, Connecticut-based company has issued about $51 billion of long-term debt and has $17 billion in outstanding commercial paper under the TLGP program, spokeswoman Anne Eisele said.
“Exiting the program slightly lowers our cost of funds,” Eisele said in an e-mail.
GE has already raised all the money it anticipates needing from debt investors for the year and is about 45 percent of the way toward its 2010 target. Chief Executive Jeff Immelt told investors on Friday the company expects to meet all its 2010 debt funding needs by the end of this year.
It also said it has reduced its commercial paper balance from more than $100 billion in 2008 to $50 billion at the end of the second quarter of 2009 — six months earlier than it had expected — and increased its cash balance to more than $50 billion.
GE Capital Corp’s 5.875 percent bonds due in 2038 weakened on Wednesday, with the spread widening 13 basis points to 337 basis points over U.S. Treasuries, yielding about 7.8 percent, according to MarketAxess data.
GE’s hefty finance arm has been the subject of intense investor concern over the past 16 months, as it has been the heaviest drag on profits at the world’s largest maker of jet engines and electricity-producing turbines.
Troubles at GE Capital, as well as a general downturn in demand caused by the brutal recession, contributed to the major ratings agencies’ decision to strip the blue-chip company of its top-tier “AAA” credit ratings this year.
Even without official government backing, some investors expressed confidence that GE would retain Washington’s support if needed.
“The market knows the U.S. government will stand behind GE and GE Capital if necessary,” said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. “It removes any U.S. government oversight while keeping the implicit guarantee.”