Monday, March 9, 2009

GE under close watch for corporate crisis

GE under close watch for corporate crisis

Joe Byrne

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In a time when the nation's largest banks and corporations are using government aid to barely stay afloat, investors are eyeing their stocks closely for signs of trouble. Sign-readers are pointing to General Electric as the next trouble-maker to watch for, Joe Nocera of the New York Times reported on Friday.

GE, the only original member of the Dow Jones Industrial Average still trading, has undergone big changes in the last decade under the guidance of CEO Jeffrey Immelt. Immelt took over in 2001 and since then has re-built the company using GE Capital, the fiscal management branch of the company. GE's AAA credit rating encouraged expansion into the credit market. GE Capital was such a key to GE's success that it provided half its earnings in 2008. Now, some say, the consequences loom.

Heavy investments in commercial real estate over the past few years didn't turn out to be profitable. Profits at GE Real Estate dropped by $1.1 billion last year, according to Bloomberg. This led the company's executives to make financing changes. Last Friday, GE announced that it was slashing its dividend by 68 per cent to finance a $9 billion injection into GE Capital's capital base. The dividend cut, which hasn't been seen at GE since the Great Depression, angered investors who bought GE shares based on its quarterly reliability.

Two days later, analysts at Sterne Agee issued a report explaining GE's dire predicament, and had bad news for investors. “GE Capital is now confronting the prospect that a downward trend...could potentially lead to an extended period of steadily lower earnings, depleted loss provisions, lower credit ratings, [and] rising borrowing costs,” Nicholas Heymann wrote.

By the next day, skittish investors had sold off large amounts of GE stock. The company's stock, which was at 17$ a few months ago, fell to less than 6$, an 18-year-low. Credit default swaps indicated investors were worried that GE was at risk of not being able to pay debts.

Moody's Investors Service is currently reviewing its AAA credit rating on GE, and Standard & Poor's has a negative outlook on the company's debt, according to the Boston Globe.

Meanwhile, representatives of General Electric are trying hard to maintain their company's image. Immelt released his annual letter to stockholders last week, reminding them that GE posted an $18 billion profit last year. He admitted that GE Capital outgrew its original purpose - to finance the core company's business – and he recognized that because of this outgrowth, GE stocks are getting hammered. GE sent out an email after the release of Sterne Agee's analysis, claiming that it was well prepared for whatever cards the market dealt. “In the unexpected event that GE Capital requires additional equity, we have a number of options to satisfy that need without seeking external capital,” the e-mail said.

The current economic situation has investors running scared. GE is the focus of analysts and market-watchers because recent events – intense pressure from shareholders, quick stock market devaluation, blown-out credit default swaps, assurance from GE that everything's fine – may be the beginning of another corporate crisis. “It’s like a moving plague that hits different targets and has now landed on G.E.,” Michael Lewitt, president of Harch Capital Management, said to the New York Times.

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