High-yield/macroeconomics (fka YIELD)

[DewDiligence]

GE Revamps Finance Unit—Again

http://online.wsj.com/article/SB122822553884272141.html

›DECEMBER 3, 2008
By PAUL GLADER

General Electric Co. encouraged investors with its latest plan to fund its financial-services unit while shrinking the operation. GE shares rose 14% even though the conglomerate lowered its financial forecast for the third time this year.

GE said Tuesday it would shrink the operation beyond earlier plans by quitting some businesses and further reducing GE Capital's reliance on short-term funding. GE said that by the end of next year, the unit would account for 30% of company profit, down from 50% last year and earlier projections of 40%. The presentation also eased speculation that GE would seek to break up or spin off GE Capital.

"Lots of other firms are losing money in the finance space while GE is talking about still making money," said Eric Schoenstein, an analyst at Jensen Investment Management in Portland, Ore., which owns GE shares.

GE's presentation was the fifth attempt in recent months to assure investors about its GE Capital finance unit, which has been damaged by the credit crisis. GE earlier announced a restructuring of the unit, an investment by Warren Buffett and participation in two government programs to guarantee GE debt.

GE Capital had long been a powerhouse of GE's earnings growth. But the unit ran into trouble this year as more borrowers fell behind on loan payments and GE had trouble attracting investors to its debt. The unit's earnings from continuing operations fell 38% in the third quarter.

"We're going to have a smaller, more focused GE Capital," Keith Sherin, GE's vice chairman and chief financial officer, said in an interview.

Mr. Sherin said GE would exit some financial-services businesses, such as residential mortgages in Europe, while ramping up areas such as midmarket business loans, real estate, aircraft leasing and energy services. "They will be the foundation for GE Capital," he said.

The operation will be restructured into three units, focused on commercial lending, consumer finance and corporate restructuring. GE also is evaluating a $5 billion capital injection into the finance operation. The company also will shed employees and consolidate facilities in its finance unit, as well as in the company's industrial operation.

GE Capital reiterated it would reduce its reliance on commercial paper, or short-term loans, which ran into problems during the credit crunch. GE plans to reduce its commercial paper outstanding to $50 billion by the end of next year from $88 billion at the end of this September -- a bigger reduction than GE earlier planned.

GE Capital also will reduce its long-term debt funding, to $354 billion next year from $391 billion this year, some of which will be guaranteed by the U.S. government. GE is expected to issue its first batch of guaranteed three-year notes this week. GE also plans to double deposits to $81 billion next year by offering certificates of deposit through brokers.

The parent company narrowed its earnings forecast for the fourth quarter to 50 to 52 cents a share from a September forecast of 50 to 65 cents a share. The projection doesn't include anticipated losses and restructuring charges of $1 billion to $1.4 billion.

The company said it is assuming continuing economic pain next year, including a slump in airline traffic and at least one airline bankruptcy, which could hurt GE Capital's aircraft-leasing business. GE also projected an 8.5% U.S. unemployment rate by the end of next year and double-digit delinquency rates in the company's U.K. mortgage division.

"GE sees a rebound in 2010, but we remain cautious," Steve Tusa, an analyst at JP Morgan, said in a note. GE Capital executives predict the unit will see earnings drop to $5 billion next year, from $9 billion this year, but will grow in 2010. Mr. Tusa predicts another decline in GE Capital earnings in 2010 but didn't change his earnings estimates for 2009 and 2010.

"I think it's positive to finally get a commitment and a plan from management on how to reduce the size of that financial-services business," said David Weaver, an analyst at Baltimore-based Adams Express, which owns 1.4 million GE shares. Mr. Weaver said he worries about a short fall in the company's core energy and infrastructure businesses next year, which could threaten GE's dividend.‹