General Electric Capital Corp’s record-breaking $11 billion global bond issue launched on March 15 is testimony to the market’s voracious appetite for high-quality, long-dated debt. The incredible demand for the deal was also a clear vote of confidence in the AAA-rated issuer, which has endured the ignominy of comparisons with troubled Tyco and subsequently came under attack from Bill Gross, managing director of investment managers Pimco.
The $11 billion issue, led by Citigroup/SSB, JPMorgan and Lehman Brothers, was increased from the originally proposed $6 billion after attracting an order book of $17 billion. The three-tranche issue consisted of a three-year, $4 billion dollar floating-rate note with a coupon of 12.5 basis points over three-month Libor; a five-year, $2 billion dollar fixed-rate bond with a spread at launch of 80bp over US treasuries; and a 30-year, $5 billion dollar bond with a spread of 109bp over treasuries.
The $5 billion tranche is the biggest-ever 30-year corporate bond, and the size of the total issue makes it the biggest-ever solely dollar-denominated corporate bond. It is second only in size to WorldCom’s $11.9 billion multi-currency issue of May 2001.
Jim Merli, global head of fixed-income syndicate at Lehman Brothers, attributes the success of the three-year and 30-year tranches to the scarcity value of issues at these maturities. “Very little has been done in the way of high-quality floating rate notes in the three-year market for the last 18 months,” he says. “The 30-year tranche had a similar scarcity value. If you look at issuance in the last couple of years, even last year where there was $600 billion of corporate supply, there has been very little in the 30-year part of the curve. In the US there are very few triple-A borrowers and they tend not to issue such long-term notes”.
An SG credit research report notes another reason for the popularity of the transaction: it was incredibly cheap for an issuer used to funding at sub-Libor rates. “Is it a wonder the deal was massively increased?” the SG analysts ask.
The deal certainly attracted a remarkable amount of international participation. About 21% of the total went to London, and syndicate officials at JPMorgan commented on the exceptional demand from non-Japan Asia for the shorter-dated tranches.
Another senior banker at one of the leads remarks that GECC had a clear agenda in preparing the deal. “They were responding to the most recent thinking about the balance between short- and long-term debt,” he says. “They issued into a part of the curve that was very attractive to investors.”
GECC has taken on board criticisms of its quantity of short-term debt and has indicated an intention to pay down its commercial paper.
In the opinion of independent credit research firm CreditSights, the issue appears to be aimed at helping the company to term out its short-term debt. Credit researchers at Dresdner Kleinwort Wasserstein agree. “We believe that it is partly in response to the rating agencies’ focus on liquidity that GECC has significantly lengthened the maturity profile of its debt through the recent bond issues. We would expect GECC will further increase the coverage of its short-term debt this year by terming out debt and potentially increasing back-up facilities.”
There has been much recent criticism of and scrutiny paid to GECC’s short-term debt. It has $127 billion in commercial paper and is the biggest borrower in the CP market. After the problems of Tyco and Qwest, investors have become increasingly concerned about the availability of funding for companies that have been shut out of the CP market.
In its liquidity risk assessment of GECC, Moody’s notes that only 24% of the company’s CP is supported by bank credit lines, although GECC has since approached its banks about extending their lending commitments from the current $34 billion to $50 billion. But even that falls far short of a full backing of its outstanding CP.
The Moody’s report also states that on a stand-alone basis, without support from parent GE, it would rate the company “lower than its current AAA level”. And given that GECC accounts for about 40% of its parent’s $14 billion in earnings, this worries CreditSights’ managing director David Hendler. “No other subsidiary contributes even half as much to GE’s earnings, and many of its manufacturing units are still in a slump,” he says. “GE Capital’s rating is supposed to be supported by it parent’s, but if the parent’s health is so dependent on its own performance, which is the dog and which is the tail? If Moody’s doesn’t think that GECC is a stand alone triple-A, is the parent really a triple-A?”
CreditSights, however, argues that the Moody’s report is inadequate, an accusation that Moody’s senior vice president, Robert Young vigorously denies. Hendler says that Moody’s failed to pick up on certain support agreements in special purpose vehicle structures that have financial ratio triggers that would require the parent to contribute capital.
“Their analysis was more 1980s than 21st century”, says Hendler. “They concentrated on balance sheet measures of liquidity, whereas for the last few years the most interesting activity has been off balance sheet. They did this because GE Capital is not regulated as a bank, even though for all intents and purposes it is very much like a bank. If you include all the off-balance-sheet special purpose vehicles as you would have to under Basle II if GECC were a bank, it would have leverage levels that would trigger certain support agreements that would require it to receive a capital injection from GE.” Moody’s Young replies that a balance sheet debt to equity ratio has little meaning for a company like GECC, and that they work on an effective debt to equity ratio that takes into consideration all off balance sheet figures.
Pimco’s Gross, has been the most vocal of GECC’s critics. In an investment outlook report, he was highly critical of GECC’s short-term debt position. “Normally companies that borrow in the CP market are required to have bank lines at least equal to their commercial paper but GE Capital has been allowed to accumulate $50 billion in unbacked CP because of the lack of market discipline.”
Like CreditSights, Gross worries about the company’s high leverage. “GE Capital is using near hedge fund leverage of seven to eight times at what appears to be (based on its AAA rating) non-hedge fund risk. But investor comfort and confidence these days is fragile indeed.”
According to Gross, GECC has used its cheap CP borrowing, which accounts for nearly half its total debt of roughly $205 billion, to help sustain its yearly earnings growth of nearly 15% by acquiring more than 500 companies over the past five years.
GECC has gone to great lengths to quash any speculation about its credit quality, and recently released a much-expanded annual report. But the report’s greater number of pages has not convinced everyone that it contains any better information than last year’s offering.
There has also been a lot of noise surrounding GECC’s $50 billion shelf filing, possibly the biggest ever, that closely followed its $11 billion bond issue. A senior banker at one of the leads says that the shelf filing is immaterial to the issue. “The shelf filing is to facilitate future issuance,” he says, “it can be used for a whole host of products, and is valid for two to three years”. Gross has said that the filing should have been disclosed to bond buyers beforehand, and that Pimco will own no GE commercial paper “for the foreseeable future”.
Judging by the demand for the issue, it appears that the market discounts these concerns. “The bonds have bounced back from the 16bp widening that followed Gross’s article, as it is clear that investors are discounting the call”, says one banker. “Bill Gross is a well-known bond investor, but the opinions that matter are Moody’s and S&P’s”, says a syndicate official at JPMorgan.
