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The cost of insuring GE Capital's debt hit a record high on fears over the unit and new data released showed the percentage of GE shares held short reached an all-time high on Feb 20.
GE shares climbed back from their lows after the U.S. conglomerate spoke out to investors, saying it had acted aggressively to adapt to the current recession and had no plans to raise additional equity.
GE shares were down about 65 cents or 9 percent at $6.36 on Wednesday afternoon on the New York Stock Exchange, after touching a low of $5.87.
People are playing the $2.50 options on this thing pretty heavily, said Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, which holds GE shares, referring to bets that the U.S. conglomerate's stock could fall to that level.
This looks like the same kind of bear rush that the financials got last summer. There's blood in the water and they're going to keep pounding away on this name.
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.
Meanwhile, foreign investors appear to be selling GE's debt in anticipation of the company losing its AAA-rating.
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.
Speaking on CNBC television, Bill Gross, co-chief investment officer of leading bond fund Pimco, attributed the sell-off to fears of a rating cut for GE and GE Capital.
The markets are beginning to anticipate a downgrade to double-A territory, Gross said.
Pacific Investment Management Co is the world's biggest bond fund, managing more than $800 billion in assets.
In an email sent to its investors, GE said: 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 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.
The percentage of GE shares held short hit an all-time high late last month, but short-sellers have been covering their positions since then, according to short-selling data research firm DataExplorers.
DataExplorers, which tracks the number of shares out on loan to short-sellers and other investors, said as of Feb 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, which is still nearly double the 0.7 percent on January 1.
Fairfield, Connecticut-based GE cut the amount of its quarterly dividend by 68 percent on Friday. Investors are now focused on a possible downgrade to its triple-A credit rating from Moody's Investors Service or Standard & Poor's.
That dividend cut has prompted a shareholder lawsuit filed in U.S. District Court in Manhattan. The purported class-action case, brought by individual shareholder Karen Christiansen, accused GE and top executives of deceiving the investing public about the future of its quarterly dividend payments.
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>.
(Additional reporting by Nick Zieminski, Dena Aubin, Emily Chasan, Deepa Seetharaman and Martha Graybow in New York; Editing by Maureen Bavdek, Gerald E. McCormick and Matthew Lewis)