GE is to sell all non-captive finance assets within GE Capital. The market has greeted the move warmly, as it did the initial sale of $23 billion of real estate and financial services assets to Blackstone and Wells Fargo in April. The stock rose 10.8% when the news broke.
That GE is guaranteeing GE Capital’s debt sent the latter’s outstanding bond prices soaring.
“Thanks to the guarantee from GE, the outstanding debt from GE Capital is now deemed one of the safest out there,” says one banker. “GE Capital’s debt is now trading cheaper than Wells Fargo, Bank of America’s and JPMorgan’s, which just wasn’t the case before the announcement.”
It is almost absurd, according to one analyst, that lenders didn’t seem to blink at the news that between $100 billion and $200 billion of risk would shift onto GE’s balance sheet.
One banker reckons the move is positive for all issuers: “As GE’s risk has reduced, it has helped everyone else’s pricing, as the perceived overall risk in the market has decreased.”
Under the terms of the deal, GE agreed to sell a $9 billion commercial real estate mortgage portfolio in the US, UK and Canada to Wells Fargo and to sell a package of real estate assets, including commercial office properties, to asset manager Blackstone for $14 billion.
Having banking assets and real estate assets on this scale managed by a financial institution rather than GE can be seen as a positive development but some argue that the risk is simply being pushed around to make already too-large-to-fail financial institutions bigger still.
While shareholders and bondholders reacted positively to GE’s move, debt investors are fretting over the disappearance of a prolific issuer.
“GE Capital was a huge issuer, particularly of commercial paper, and without them the supply for investors will be far less,” says one head of FIG. “Investors will therefore be looking for alternatives to replace the flow. That’s going to take some time to adjust to, but issuers such as banks and insurers may pick up some of that demand.”
GE has raised the question whether other industrials will follow suit, though it’s hard to find any that have the same profile as GE.
As Sarah Wyeth, industrials corporate analyst at Standard & Poor’s, says: “GE has always been something of an unusual animal that doesn’t fit into any box and really is the only entity in the US that had that kind of business structure and risk profile.”
Says the FIG head: “There just aren’t other firms who are similar. In the case of General Motors or Ford the finance arms are based around the business. GE Capital was chiefly financing for third parties and had nothing to do with the core business.”
Gaze of regulators
Another source says there are financials companies with leasing businesses that are not correlated to their core business that could be encouraged to sell off given the boost to the share price and ability to move out from the gaze of regulators.
“The European banks spring to mind that have businesses in equipment or auto leasing that are not mission critical to being a retail bank for example,” he says.
A big motivation behind GE’s move is the potential to shed its G-Sifi status, something that institutional buyers of such assets are acutely concerned by too.
“I don’t get the sense that [designation as a G-Sifi] is afoot,” says one banker. “Asset managers have no deposit function and so there is no concern of a ‘run on the bank’ And the regulators have already taken a hard look at the likes of BlackRock and they decided against regarding them as Sifi. It’s hard to see why this would change anything.”
Another asset manager agrees: “Asset managers have very long-term committed capital. They aren’t hedge funds.”
Analysts at Barclays see little downside for buyers of GE’s assets: “This is a once-in-a-decade opportunity for financial folks to buy good assets at fair prices and have instant accretion without big leverage increases. In short, it’s not lost on the banks/sovereigns that GE’s assets offer a niche opportunity for growth and higher returns than most are getting with their existing portfolios today.”
They are expecting the bulk of the assets to be bought by a sovereign with smaller pockets of assets bought by “banks within niches”. Sales are expected to be sooner rather than later.
“This is not a now until 2017 process. It’s a now process,” says Scott Davis lead analyst on the Barclays report.
Indeed it reportedly took just six weeks for the deals with Blackstone and Wells Fargo to be struck. Bank of America Merrill Lynch advised GE on the removal of its status as a Sifi and on the sale of assets to Blackstone. JPMorgan was adviser to GE on the restructuring.