GE Capital morning session

March 19, 2009, 11:21 PM UTC

The first half of the presentation, led by chief financial officer Keith Sherin, was received well by investors who drove the stock up as much as 6%…


People are already lining up at 30 Rock security for the GE Capital (GECC) discussion and the buzz is palpable. Thanks to the Wall Street meltdown, an investor presentation on loan loss provisions is now an electrifying event.


A couple of pre-game thoughts from investors and analysts…

* This is going to play heavily to the fixed income guys rather than the equities people. Severe and sharp movements in yields and credit default swap spreads on GE bonds have driven stock performance. The stock can’t go higher until the credit markets believe in GE.

* We’ll hear a firehose of numbers, but there is a difference between data and meaningful data. We’re looking for real loan loss stress cases, and the market will be very disappointed if they get either weak stress cases or any signs of “just trust us, we know what we’re doing,” rather detailed explanations.

* For a long time the company didn’t want to talk about GECC or denied there were any problems. When the stock went down and GE was finally forced to open up about GECC, it only drove the price down more because we could see that there were potential issues. If they are truly transparent today, this could solve the spiral of worry, denial, stock price decline, management disclosure. This is the best case scenario.

* The major questions are whether they will be taking charge-offs on receivables, loans, and goodwill. We would like to hear about any capital raising plans. We will be listening for possible shifts in strategic direction such as reducing reliance on GECC.

* GE’s job is to manage expectations incrementally and minimize the rate of change in perceptions (to the downside) until the credit crunch and recession lift and we can actually know how to value this company. It could be several quarters before we really know where we stand with GECC.


Introductions: Keith Sherin, CFO, Mike Neal, GE Capital CEO, and 15 members of the GE Capital leadership team.

There will be an hour at the end for questions, none throughout the presentation. Eyebrows shoot up…

Turns to Sherin.


Sherin: Reiterates that the “hot spots” will be covered and that the company has a strong liquidity position, completed 93% of debt funding through the year. There is enough capital to weather a lot of adverse cases, and even under these stress cases GECC will be profitable. There will be no need to raise external capital.

Says there is 6-1 leverage in GECC using the capital they raised last year. They raised cash balances. They have $60 billion in capacity with the government.

Ratings update: We’ve been working closely with the ratings agencies. Considers the AA+ with stable outlook from S&P a terrific outcome because the financial biz is clearly under stress.

Final word on GE’s commitment to GECC: GE must commit money to GECC if the finance arm doesn’t hit a target ratio. They have consistently put money into GECC to keep it adequately capitalized.


Mike Neal says GE is going to grind you through 174 pages of things you probably haven’t seen before.

Also reiterates that they’re here to be informative, rather than predictive.

Shows a chart from the Dec. 2 meeting reiterating that GE still has a cost advantage over other financial firms. As well as the GECC portfolio breakdown that most of the crowd has seen before.

Emphasizes that they avoid all of the most toxic securities/acronyms that have wreaked havoc on the market: CDS, CDOs or SIVs. No mezzanine or high yield bonds.

This is all important information, but for most investors they’ve seen it before – the breakdown of GECC’s segments and why they are great… why GECC is much more conservative than the typical bank. While this may be true, no one is saying GECC is the next Lehman. They just want to know if GECC is going to be an ongoing source of surprise earnings misses.

As one investor said: Nothing new so far, just the same: “All is well at GE, just trust us.”


They threw up a slide with the summary of their stress testing. Interestingly, it looks like in their worst case scenario (which utilizes Fed guidance…) U.S. unemployment will peak at 10.1% and GDP will decline by 3.3% for 2009. Unemployment last month hit a 25-year high of 8.1 percent and Michigan, which has the worst unemployment in the country, is already at 11.6%.


Kathy Cassidy, GE Treasurer, gives detail about the company debt and cash flow, as well as sources of alt funding. they won’t be going back to the market without government backing until the markets stabilize. The company is following the progress of other government programs with an eye toward how they can help the debt markets generally. The company continues to emphasize that they participated in government debt programs NOT because they had to, but because the government wanted them to… and because GE wanted to support those programs to support the debt markets generally.

She’s reiterating statements on capital ratios, liquidity, and debt that are a continuation of her Dec 2 remarks.

She says GE could use some of its $60 billion leftover from its TLGP line to pre-fund debt that will come due in 2010.


GE Capital chief risk officer Jim Colica again reiterates that we’re going to get a lot of detail today, though no new detail has come.

Getting back to the comments made by Mike Neal, he said GECC does not underwrite any credit default swaps. Since so many finance companies at least hedged their books with CDS, it is surprising that GECC avoided doing so. They didn’t underwrite, but did they buy CDS against bond defaults? Remember, doing so was considered a savvy and risk averse strategy before CDS became suspect. Would be an interesting question for the Q&A that will happen at the end of the session.


Colica’s been showing slides that show that the portfolio is diverse and that this should allow it to hold up under economic duress. But, as one analyst says, the stress test is presented as a conceptual process, not a rigorous scenario analysis of what would happen under truly adverse economic possible outcomes.

But it is good that in its stress testing, GE has not factored in the potential positive benefits from the stimulus program. This provides room for positive surprises in the book.


The commercial real estate team is up. This is the moment many have been waiting for. This is where we should get some detail. They key drivers in the stress case will be GDP (-3.3%), unemployment (peak 10.1%), and liquidity. It’s a $368 billion portfolio. The debt portfolio is $48 billion.

The division finances the purchases of real estate by third parties. They own and manage real estate, including office, apartment, warehouse, and retail buildings around the world. They provide financing to owner-occupied commercial real estate.

The head of the division (Ron Pressman?) says that in the sector “the pressure point will be centered on debt maturities in 2009 around the world,” adding that banks will be forced to extend or restructure loans, or even foreclose. All of this is putting pressure on values in the marketplace. He notes that value pressure varies around the world. In Tokyo and Paris GE sees 5.6% rental rate pressures; while in London and Madrid the company sees 20% plus. Values will be under downward pressure, which is why GE marked down the portfolio by 18% in the fourth quarter.

The $48 billion debt portfolio is primarily made up of senior secured first mortgage positions, which the company says is the strongest part of the capital structure.

They continue to emphasize their strong risk management.


Credit costs: The total debt portfolio has outperformed the industry overtime and they’ve historically had fewer charge-offs. The slide that shows this only goes back to 2005.

The company is emphasizing that reserves have been going up. It should be noted that critics have said GECC is still under-reserved, despite the increase. The company’s reserve model for this portfolio uses industry models.


Stress test for property valuation is up (3500 commercial tenants 8000 properties, 2600 cities). They look at the net operating income of all 8,000 properties (4800 underlie debt and 3200 underlie equity) to come up with recession cases for rents and occupancies. Here’s the slide for the stress case. Keep in mind, all stress tests use the Fed’s assumptions for GDP and unemployment.


Sorry for the break. Getting notes from GE asking us to reiterate that we’re listening to the presentation and watching the webcast with color coming at us from participants within the room. Point taken. Thanks! Other listeners, please feel free to comment or email me at


The company has noted that it bought 80% of its real-estate holdings with cash and has no mortgages. This is certainly a good thing. Matthew Kelley, a Sterne Agee bank analyst, wrote in a recent note that GE dove into the real estate market at the height of the boom. We’ll see after Q1 how GE accounts for the fall (if any) in values.


Here is a slide showing why GE’s unrealized loss is so small compared with real estate investment opportunity funds.


This slide breaks down their unrealized loss of $4 billion for 2008.
Even though alarm bells have interrupted the meeting, the stock is on a tear. Thanks to the morning performance, GE shares are up more than 6%.


They’re starting back up and are seating people after an impromptu break. Reuters’ take away from the top half of the presentation: in its stress case, General Electric expects $900 million in losses against loans at its GE Real Estate portfolio, representing an implied default rate of 8 percent. Assuming the Fed’s worst case for the economy, that number would rise to $1 billion, or an implied default rate of 10 percent. Its current default rate is 1.01%.


Meeting begins with joke that shortsellers called in the fire alarm and a couple of bomb threats. Funny? Um, sure…

Back to the loan losses summary…

It’s interesting to see the velocity of equity impairments.


Jumping back to the top of the session to Sherin’s remarks that GE Capital will be profitable. A reader reminds us that S&P, in its ratings outlooks, said that GE Capital would post “little or no profit or possibly a ‘modest net loss’ this year and next.” I checked in with S&P analyst Scott Sprinzen the other day, and he reiterated this comment noting 1) that S&P lowered its rating on GECC as a standalone entity from its last outlook. 2) That S&P does have a stable outlook on GE as a whole.

Blogger Peter Cohan writes. So who’s right — S&P or GE?

Cohan sums up investor sentiment well when he writes, “I hope that investors agree with Sherin that GECC will do far better than S&P expects. If so, GE stock may have further to rise. But if GECC offers unpleasant surprises later this year after a $5 billion profit forecast, the credibility of management could be shot.”


Commercial lending and leasing is up. It’s the largest portion of the asset base. About half is equipment lending and leasing, 17% is leveraged loans, 13% is asset based leasing. Here’s the breakdown.

Detail on the lending book: Most of the book is in senior secured debt, which is a theme running through the presentation. This is one way to think about the book: the division only lends 59 cents against every dollar of recoverable assets. They also provide numbers on their leveraged loan book and equipment leases and loans.


The equipment residual values: aircraft and fleet cars make up over 60% of the collateral. They’re seeing losses in fleet (in keeping with the economy and peers). and they going to work to mitigate that loss. They have about $1 billion in exposure to the big 3 automakers. Could have potential loss in the $80 million to $150 million range.


This is the stress test summary for the division; for its large “Americas equipment” segment that has been under duress; and for leveraged loans.


The restaurant franchise book. This has been another area of weakness and the company puts up a stress case slide for this area, too. Not as much detail for these stress cases, likely because there’s a ton of info to go through.


Time to go through GECAS, has always been a bright spot for the company, the division that takes care of leasing, financing, and servicing for commercial aircraft with 230 customers in over 70 countries.
Thanks to the recession, a decline in global traffic, and a glut of orders in the past few years, GECAS could be a point of weakness for the company. GECAS execs anticipated this, they say, at the end of 2006 when they “weren’t aware of the words subprime” or the impact that the housing crisis would have on the economy.
They do a good job of going through how historically the unit has weathered downturns in the industry and that they’ve recently been cautious in this segment, giving, as with the other divisions, a slide with their stress case.
But some say questions remain. The past downturns for this division were cyclical problems in the airline industry itself. We’re seeing some of this now, and also seeing intermediaries, the leasing companies, feeling pain due to the credit markets.
They do say they’ll be aggressive with distressed accounts, litigating when necessary.
Intermission. I’ve been getting some good emails. Please send over more thoughts to