GE pays price for credit crunch

GE pays price for credit crunch
By David Oakley in London
Copyright The Financial Times Limited 2007
Published: August 31 2007 00:01 | Last updated: August 31 2007 00:01


General Electric, the world’s biggest corporate borrower, on Thursday highlighted the sea-change in the markets since the summer’s turmoil when it paid much higher interest rates to raise debt.

The world’s second-biggest company by market value, and a benchmark for other companies looking to issue, will have to pay an extra €7.2m a year to borrow about €1.9bn as investors demanded much higher premiums in the post-liquidity crunch climate.

The deal, the first significant corporate bond issue in the European markets since July, is a warning sign to other lower rated issuers as September, traditionally a heavy month for raising debt, approaches.

Other issuers forced to pay higher interest rate charges recently have included Deutsche Bank, Citigroup and Comcast, the US cable operator.

GE Capital Corp, GE’s financing arm, is rated Aa1 by Moody’s and AA+ by Standard & Poor’s, the second-highest level on the investment grade scale.

If GECC has to pay higher debt charges, then lower rated issuers, especially those in the junk-grade arena, could face serious difficulties as they seek to refinance.

The uncertainty forced the high-yield market to shut down in Europe this month.

Not a single deal was attempted, according to Dealogic, while in the US only $2bn (€1.46bn) was raised in high-yield bonds.

Robert Whichello, head of European debt markets at BNP Paribas, said: “The world has fundamentally changed. It is a much tougher credit market, particularly for lower rated issuers.”

Dominic White, a fund manager at Morley Fund Management, agreed: “It is a buyers’ market now. The pendulum has certainly shifted in the favour of investors.”

However, bankers and corporate finance directors drew positive conclusions from the deal and praised GECC for pushing ahead in an uncertain market.

GECC priced €1.5bn and £600m (€890m) in 60-year subordinated bonds to yield 100 basis points over mid-swap rates – the pricing reference point for European bond issues.

The company priced a bond structured in the same way in September 2006 at 62 basis points over mid-swaps, which means it had to pay an extra 0.38 percentage points in today’s market.