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GE to Sell Debt Under FDIC Program

by Lynn Shapiro, Writer | March 09, 2009
GE
GE Capital said Monday it would sell guaranteed bank notes through the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program.

Tapping into the program, companies can sell their debt insured by the full faith and credit of the United States, in exchange for paying a fee to FDIC. The provision has helped companies raise more than $100 billion since late November, at rates below what they would have to pay banks based on their credit ratings. The program also offers relief to consumers.

"In the new economy, the interaction between government and business will be changed forever, with government as a stronger regulator, an industry policy champion and a key partner," GE's chief executive Jeffrey Immelt wrote in a letter to shareholders last week. Immelt is a member of President Barack Obama's Economic Recovery Advisory Board, along with Caterpillar, Inc. chief executive James Owens.

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Benchmark Offering

GE will said it would sell what is known as a benchmark offering; the company will offer at least $500 million for each "piece" of the deal, to include two-and three-year maturity dates. For example, one piece of its debt is likely to be sold at a fixed rate, while another group of bonds would be sold at a two-year floating-rate.

GE has entered the FDIC program before. Last Friday, the company's FDIC-backed three-year debt was trading at yields 0.87 of a percentage point, higher than Treasuries, analysts said.

Analysts note GE might have decided it had no choice but to turn to the FDIC, after the cost of protecting GE Capital's debt against default climbed to a record high last Wednesday, the day its shares hit a 16-year low. Shareholders are concerned GE will lose its vaunted AAA rating in April, as the company is under-capitalized and short on financial reserves.

The shares also took a beating late last month, after GE told shareholders it would be forced to renege on its vow to cut its generous quarterly dividend from 31 cents to 10 cents. Objecting to the dividend cut, GE was hit by a shareholder suit last week alleging GE "conspired to deceive" shareholders to buy the company at artificially high values."

Credit Default Swaps Soar

Meanwhile, because of the possible lowering of GE's top credit rating, the price of its five-year credit default swaps soared 20 percent upfront, plus 500 basis points annually, meaning investors would have to pay $2.0 million in an upfront payment, plus $500,000 a year to insure $10 million of debt, according to data from Phoenix Partners Group.

GE Set to Benefit from Stimulus

Trying to look on the bright side, Immelt wrote to holders last week saying that the conglomerate plans to "radically downsize its financial unit and capitalize on the strength of its infrastructure businesses, which are set to benefit from new government spending and demand for improved performance and energy efficiency."

He noted he was taking "aggressive actions to roll back costs, restructure financing and raise cash to grow its company." He added, "Successful companies won't just 'hunker down,' they will seek out the new opportunities."