GE could be $41-bil­lion prob­lem for Big Banks

Com­pany’s credit fa­cil­i­ties could rank as largest loans to any U.S. firm be­yond 2019

Calgary Herald - - FINANCIAL POST -

When it comes to U.S. banks’ lend­ing risk, it doesn’t get much big­ger than Gen­eral Elec­tric Co. The five big­gest Wall Street firms have com­mit­ted to lend­ing at least US$3.5 bil­lion each to the in­dus­trial gi­ant fac­ing con­cerns about the sus­tain­abil­ity of its debt.

GE has al­most US$41 bil­lion in credit lines it can draw from, ac­cord­ing to its lat­est quar­terly reg­u­la­tory fil­ing. If fully tapped, the two main credit fa­cil­i­ties would rank as the largest loans to any U.S. com­pany that go be­yond next year, data com­piled by Bloomberg show. GE had used only about US$2 bil­lion of the avail­able credit by the end of the third quar­ter, leav­ing it­self am­ple room to pull more if nec­es­sary.

From GE’s per­spec­tive, the un­used credit is a cru­cial back­stop as an­a­lysts voice con­cerns about the risk of a fund­ing short­age. Chief ex­ec­u­tive Larry Culp has been sell­ing as­sets to raise cash and is un­der pres­sure to raise more through a stock of­fer­ing. The un­tapped credit “gives us a foun­da­tion” as the firm takes steps to re­shape it­self and ul­ti­mately re­duce its bor­row­ings, he told CNBC this month.

From the banks’ per­spec­tive, the pos­si­bil­ity of a draw­down by a bor­rower get­ting shut out of other fund­ing sources poses risks, in­clud­ing de­fault if the com­pany ul­ti­mately proves un­able to man­age its obli­ga­tions. In debt mar­kets, the pre­mium de­manded by in­vestors to in­sure against a de­fault has jumped, sig­nalling the pos­si­bil­ity of fur­ther cuts to GE’s credit rat­ing and higher costs for new bor­row­ings. GE was cut by the two big­gest rat­ing firms last month, end­ing up three grades above junk.

GE di­vided its credit fa­cil­i­ties into three cat­e­gories at the end of Septem­ber. The main one in­cludes a US$19.8 bil­lion credit line from six banks, which ex­pires in 2020. Then there’s a US$20-bil­lion backup fa­cil­ity from 36 banks ex­pir­ing in 2021. The third group is a col­lec­tion of credit lines ar­ranged in­di­vid­u­ally with seven banks, ex­pir­ing be­tween Fe­bru­ary and May of next year.

Such com­mit­ments can make up an out­sized chunk of a bank’s port­fo­lio. Mor­gan Stan­ley’s share of the first GE fa­cil­ity amounted to six per cent of its in­vest­ment­grade lend­ing com­mit­ments at the end of Septem­ber. At Gold­man Sachs Group Inc., it was four per cent of the bank’s high-grade book.

“I’m not con­cerned about GE’s credit at all,” Mor­gan Stan­ley CEO James Gor­man said Tues­day in an in­ter­view on Bloomberg Tele­vi­sion. “The mar­ket over-wor­ries. GE is a fan­tas­tic in­sti­tu­tion, they have tremen­dous abil­ity to restruc­ture.”

Spokes­men for the other banks in the first credit line de­clined to com­ment, while GE’s re­ferred to Culp’s pub­lic re­marks.

GE’s quar­terly fil­ing doesn’t iden­tify the three dozen lenders in the backup fa­cil­ity or spec­ify how they are split­ting their com­mit­ment. JPMor­gan Chase & Co. is among mem­bers of that group, ac­cord­ing to data com­piled by Bloomberg. So is Wells Fargo & Co., which isn’t one of the lenders named in the first line.

Still, there are lim­its to banks’ ex­po­sure. The first credit line has a manda­tory re­duc­tion and re­pay­ment clause, which re­duces the amount avail­able to GE over time. In March, the line is set to be cut by about US$5 bil­lion, and in De­cem­ber 2019 by an ad­di­tional US$7.5 bil­lion. In June 2020, the credit line would shrink to just US$5 bil­lion. At each mile­post, GE would have to pay back the dif­fer­ence if it has drawn more than the re­main­ing amount al­lowed.

“They’re slowly but surely los­ing ac­cess to that fa­cil­ity, bit by bit,” said Dino Per­a­gallo, a debt covenant an­a­lyst at Xtract Re­search LLC. “Most peo­ple re­fi­nance their fa­cil­i­ties within a year of ma­tu­rity, so this wouldn’t be a prob­lem typ­i­cally. But with the con­cerns GE is fac­ing, maybe it will be tough to get a new fa­cil­ity when this one is re­duced.”

Culp told CNBC that the com­pany doesn’t want to main­tain its in­debt­ed­ness. “We have no higher pri­or­ity right now than bring­ing those lever­age lev­els down,” he said.

GE’s fil­ing shows there are also so-called off­set pro­vi­sions for firms par­tic­i­pat­ing in both syn­di­cates, po­ten­tially pre­vent­ing the com­pany from tap­ping the same lenders twice. And, banks can — and usu­ally do — hedge them­selves against losses from big bor­row­ers by buy­ing credit de­riv­a­tives that act as in­sur­ance.

Com­pa­nies typ­i­cally draw down heav­ily on their credit lines when fac­ing fund­ing short­falls. Ear­lier this month, Cal­i­for­nia util­ity op­er­a­tor PG&E Corp. fully used its credit fa­cil­ity. At the time, in­vestors wor­ried the com­pany might lose its in­vest­ment-grade credit rat­ing or face li­a­bil­ity re­lated to wild­fires rav­aging the state.

GOH SENG CHONG/BLOOMBERG

GE has used only about US$2 bil­lion of its avail­able credit by the end of the third quar­ter. It con­sid­ers the un­used credit as a key back­stop amid con­cerns about a po­ten­tial fund­ing short­age. Still, it’s a ma­jor risk for banks if the com­pany is un­able to man­age its obli­ga­tions.

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