General Electric Co
Shares of the U.S. conglomerate rebounded in late trading in a broad market rally, after the head of GE Capital bought more shares and a widely followed bond manager said he was comfortable with GE's credit.
The world's largest maker of jet engines and turbines that produce electricity told investors that it had acted aggressively to adapt to the recession and that it had no plans to raise additional equity.
The cost of insuring GE Capital's debt hit a record high on concerns over the unit, and new data showed the percentage of GE shares held short reached an all-time high on February 20.
GE shares closed down 32 cents, or 4.6 percent, at $6.69 on the New York Stock Exchange, after touching a low of $5.87 earlier in the day.
This looks like the same kind of bear rush that the financials got last summer, said Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, Ohio. There's blood in the water, and they're going to keep pounding away on this name.
Huntington Asset Advisors holds GE shares.
Loomis Sayles' Dan Fuss, one of the most widely watched U.S. bond managers, said the company's corporate bonds were still attractive even though Moody's Investors Service is reviewing its triple-A rating on GE for possible downgrade, and Standard & Poor's has a negative outlook on the company's debt.
GE is a very strong, viable company, said Fuss, vice chairman of the Boston-based money manager. There is no liquidity issue for GE and GE Capital.
GE's bonds are trading as if the company had already lost its top-shelf rating.
With concerns about GE Capital sweeping through financial markets on Wednesday, some of the unit's bonds fell in price by as much as 9 percentage points, sending yields as high as 10 percent. By contrast, the unit a year ago sold seven-year debt at a yield of less than 5 percent.
The downgrade is way more than priced in, said Spencer Lee, head of the trading desk at SCM Advisors in San Francisco.
Investors are concerned that GE Capital may not have set aside large enough reserves to cover higher defaults on its loans, though the company said on Wednesday it had stress-tested its financial portfolio and was prepared.
The longer the recession goes on, the deeper unemployment goes, the more that what's left of the consumer portfolio is going to bleed out; there's no question about it, said Huntington's Sorrentino.
The Fairfield, Connecticut-based company said on Friday it would cut its dividend by about 68 percent, which would save it about $9 billion a year.
Given GE's large retail shareholder base, some people holding the stock for its yield may now be selling, said Wayne Titche, co-manager of AHA diversified equity fund and chief investment officer of AMBS Investment, with holdings of 380,000 shares.
People are panicking because of the credit default swap spreads and because the yields are going up, and you have this perfect storm, Titche said.
The stock decline also reflected some big sovereign wealth funds selling ahead of the expected rating cut, bond investor Bill Gross said on CNBC television.
GE e-mailed investors to say that in the unexpected event that GE Capital requires additional equity, we have a number of options to satisfy that need without seeking external capital.
Michael Neal, a GE vice chairman who heads GE Capital, said in a filing with the U.S. Securities and Exchange Commission that he had bought another 50,000 GE shares on Wednesday. That was his second purchase of the week. He and Chairman and Chief Executive Jeffrey Immelt bought more GE stock on Monday.
The cost of insuring GE Capital's debt against default with credit default swaps earlier spiked to 20 percent upfront, meaning an investor had to pay $2 million immediately plus $500,000 a year to insure $10 million of debt, according to data from Phoenix Partners Group. Later in the morning, the upfront payment eased to $1.5 million.
GE shares have lost roughly 79 percent of their value over the past year, compared with a 45 percent drop for the Dow Jones industrial average <.DJI>. The 130-year-old company is the sole remaining original member of the Dow.
Doug Ober, CEO of Adams Express Co
This is a matter of investor confidence in the entire financial system, he said. I don't fully grasp why GE has suffered the brunt of this as it has.
DataExplorers, which tracks the number of shares out on loan to short-sellers and other investors, said as of February 20, 1.75 percent of GE shares were out on loan, an all-time high. Its most recent data showed short-sellers, who profit when share prices go down, had been covering some of their positions. As of Wednesday, the company said its data showed only 1.33 percent of GE shares were out on loan, still nearly double the 0.7 percent on January 1.
After months of defending the dividend, GE cut it back last week, prompting a shareholder lawsuit.
A purported class-action case, filed in U.S. District Court in Manhattan by individual shareholder Karen Christiansen, accuses GE and top executives of deceiving the investing public about the future of its quarterly dividend payments.
Our statements about the dividend have reflected accurately our view of the best allocation of capital at the time the statements were made, said spokesman Russell Wilkerson. In the ever changing environment that GE and other companies have been confronting over the last five months, the best allocation of capital is a subject that we have necessarily revisited as the circumstances have changed.
(Additional reporting by Nick Zieminski, Jennifer Ablan, Dena Aubin, Emily Chasan, Deepa Seetharaman and Martha Graybow in New York; Editing by Gerald E. McCormick and Matthew Lewis)