Thursday, October 23, 2008

GE to Use Fed’s Commercial Paper Facility Next Week

(Bloomberg) General Electric Co., the biggest U.S. issuer of commercial paper, plans to use the Federal Reserve’s new short-term funding facility when it starts next week.

GE and its General Electric Capital Corp. finance arm registered as users of the Fed’s Commercial Paper Funding Facility, spokesman Russell Wilkerson confirmed today in a telephone interview. The company hasn’t set an amount that it plans to borrow and will base that decision on customers’ need for liquidity, he said.

“This is a way for us to demonstrate our support for what the Fed is doing, which is providing all-around liquidity,” Wilkerson said. “There is a role for us and other large issuers to play here in demonstrating that this action is good for the market and very important for the buyers of GE paper as it provides a secondary market.”

The Fed is seeking to stem the credit-market seizure and revive demand for commercial paper, short-term debt that companies use to finance their day-to-day operations, by offering to buy 90-day debt of top-rated companies. The central bank this week also said it would provide as much as $540 billion in loans to money-market funds, the biggest buyers of the debt. Companies cut back their short-term borrowing for the sixth-straight week, the Fed said today, as investors balked at taking on the debt.

“We are encouraged that many issuers have already registered in the program because that provides a signal to investors of greater liquidity support to this key financing market,” said Andrew Williams, a Fed spokesman in New York.

Reducing the Stigma

Large issuers such as GE Capital, a direct issuer, can help de-stigmatize the market by testing the facility, Wilkerson said.

“To ensure access and operability and to demonstrate our support for the Fed’s action, we plan to test the facility,” GE said in an e-mail to investors today. “We believe the CPFF will strengthen confidence in the prime commercial paper market and encourage more term buying.”

GE Chief Financial Officer Keith Sherin told investors Oct. 10 that GE, the world’s biggest maker of jet engines, power-plant turbines, medical imaging equipment and locomotives, was studying the terms of the plan, even though the company didn’t need help financing itself. GE Capital, the finance arm, is eligible for as much as $60 billion under the facility. GE could borrow $10 billion, Sherin said.

The company has still been able to sell commercial paper uninterrupted, Wilkerson said today.

Special Fund

The Fed is setting up the special fund to buy commercial paper, and will start the program on Oct. 27. The U.S. Treasury will make a $50 billion deposit into the fund as an indication of support. The Fed said the maximum amount of commercial paper that could be funded by the facility is about $1.8 trillion.

The central bank will buy only debt with the top short-term ratings of A-1, F1 and P-1 given by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service respectively. The facility provides for 90-day borrowing which may help lengthen the time periods for which liquidity is available.

Fairfield, Connecticut-based GE’s use of the fund may help boost liquidity in the market by encouraging investors to buy debt of lower-rated companies. Companies such as Computer Sciences Corp. have tapped bank credit lines amid a dearth of buyers for the day-to-day funding. Because Falls Church, Virginia-based Computer Sciences is rated below the A1/P1 requirement, it isn’t eligible for the Fed financing.

New York-based American Express Co., the biggest U.S. credit-card company, said this week that it could meet its needs in part by using the facility. American Express is rated A1-P1.

Cheaper Financing

Using the Fed facility may give GE Capital cheaper financing. The yield paid under the Fed facility would be about 2.75 percent to 3 percent, compared with an average 2.83 percent for financial companies, based on daily central bank data posted yesterday. Financials paid 3.95 percent a week before the program was announced. GE Capital, the company’s finance arm, today posted an offering rate of 3.1 percent on its paper maturing in 90 days.

GE’s finance division, which accounted for about half the company’s profit last year, includes aircraft leasing, private- label credit cards, real estate, mid-market company financing and bankruptcy lending.

GE Capital will probably have a commercial-paper balance of about $75 billion in 2009, less than the $80 billion forecast for the fourth quarter, Sherin said on the call. Access to about $20 billion in cash from its finance businesses brings its net balance below its $62 billion in bank lines, he said.

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