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GE Shakes Up Corporate Credit Market

There may be a shortage of human bond traders manning their desks these days, but there’s no shortage of investor interest in IG issuance thanks to the rather unfortunate fact that even recently bailed out governments will charge you to loan them money. Amid voracious demand (which incidentally is helping to sustain elevated equity prices as companies use their debt sale proceeds to fund buybacks) and record issuance, one major source of supply is set to go offline as GE Capital will issue no more long-term debt for half a decade. That’s a big deal because as WSJ notes, GE Capital paper accounts for 2% of all outstanding IG debt and the absence of issuance may well serve to further inflate the corporate bond market bubble as reduced supply meets still-elevated demand. 

[GE] said it doesn’t expect its GE Capital unit to sell new long-term debt for at least five years, effectively eliminating one of the biggest corporate issuers at a time when firms around the globe are tapping the market at a record clip…

 

GE also said it would guarantee repayment of roughly $210 billion of debt from GE Capital. Previously, the parent company provided other support but not an unconditional guarantee…

 

The retreat of GE Capital could lower the supply of new corporate bonds, adding modestly to the trends that in recent years have fueled a sharp rise in bond prices and a corresponding decline in bond yields, analysts said…

 

GE Capital is widely considered a core issuer by bond portfolio managers and a stalwart among companies bearing investment-grade ratings. The company used proceeds from its debt sales to finance its operations, including lending.

 

The firm sold the most investment-grade bonds in the U.S. of any corporate subsidiary from 2002 to 2007, as well as in 2009, 2011 and 2012, according to Dealogic. By market value of outstanding debt, it is the fourth-largest issuer represented in the Barclays U.S. Corporate Investment Grade index.

 

In 2009, GE Capital sold $52.3 billion in bonds, accounting for 5.1% of highly rated U.S. corporate-debt issuance. The firm has issued less each year since then, but GE Capital bond sales still make up 1.2% of new bonds sold this year, according to Dealogic figures.

What this means is that investors desperate for high grade (and by “high grade” we’re of course talking about an issuer here who just seven years ago needed an FDIC guarantee on its senior unsecured paper) paper will have one less source of supply, which will weigh on market liquidity going forward. 

Here’s Mizuho (via Bloomberg):

GE will keep some in-house financing but its need for wholesale finance will probably shrink by two thirds as it downsizes

 

Doubt that the new owners of former GE units/assets will use unsecured bond debt to fund their operations

 

Investors are already short of high quality paper and GE’s plans look likely to intensify the squeeze.

And a bit more from CreditSights:

Market liquidity will significantly shrink as GECC’s previously massive debt footprint comes down substantially over next 24 mos.

 

Total funding of $350b is expected to fall by nearly half by year-end 2016.

 

This reduction, specifically L/T tradeable debt, will be driven by a front-loaded maturity schedule ($50b+ maturing by year-end 2016) and a stated intention to redeem currently callable securities (CreditSights’ est. ~$14b).

 

The above, coupled with absence of new supply through at least 2019, should extract a material amount of liquidity from the market.

 

Meanwhile, you can also count GE Capital out of the commercial paper market which isn't exactly great news for money market funds which are already laboring under ZIRP and NIRP: 

GE Capital, once a prolific issuer of the debt known as commercial paper, also plans to significantly reduce its footprint in that market, where firms issue short-term IOUs to finance their activities and near-term expenses. The company announced it would reduce its outstanding commercial-paper debt to about $5 billion by year end, down from about $25 billion during the fourth quarter of last year and from $72 billion at the end of 2008.

 

The commercial-paper market shrank in the aftermath of the financial crisis, as investors became skittish about lending to all but the most stable companies on such a short-term basis.

 

GE Capital’s withdrawal from the market is “certainly not good news for supply-starved money-market investors,” said Peter Crane, president of Crane Data, which tracks money-market funds.

 

So, in sum, the cessation of IG issuance by an entity which not that long ago needed a government backstop on its debt stings in a market where "risk free" assets will all (at least in inflation adusted terms) cost you money to buy into. And even though GE has also removed $20 billion in commercial paper issuance from the market, it's important to remember that a $50 billion buyback program will do wonders when it comes to underwriting the company's stock.