- NEW YORK (Reuters)
- A blistering attack launched this week by noted bond manager Bill Gross
against General Electric Co. could reduce the ease with which the largest
U.S. companies raise money, and boost their costs, according to experts.
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- Gross, who runs the $53 billion PIMCO Total Return Fund,
the world's largest bond mutual fund, faulted GE and its General Electric
Capital Corp. finance arm for relying too much on commercial paper to make
acquisitions he said it needed to maintain double-digit annual earnings
growth.
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- His attack came after Moody's Investors Service this
week reported on the emergency financing plans of 325 companies, including
GE Capital. This as investors remain jittery about companies' ability to
raise cash if they are shut out of the commercial paper market, as phone
company Qwest Communications International Inc. and conglomerate Tyco
International Ltd. were this year.
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- That market for unsecured debt maturing within 270 days,
which companies often use to fund daily operations, has shrunk to $1.39
trillion from $1.62 trillion in 15 months, according to the Federal Reserve,
as investors grew more skeptical of corporate earnings and accounting in
a weak economy.
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- Not even "triple-A" rated GE proved immune,
as it found out this week.
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- "The commercial paper market has always been a confidence
sensitive market," said Roger Arner, a Moody's managing director.
"Market access has declined for lower-rated issuers over the last
18 months, and the last couple of days show that investor appetite moves
based on market conditions. Issuers and investors need to be prepared to
deal with that."
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- BACK IT UP
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- Among the biggest market concerns facing GE Capital,
with $127 billion of short-term debt, is that it has only $33 billion of
"backup" bank credit lines to tap were it suddenly unable to
sell commercial paper.
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- GE said it is trying to boost this backup protection.
But it's hardly the only company with big potential funding risks.
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- Deborah Cunningham, who oversees $135 billion of money
market assets for Federated Investors in Pittsburgh, said that between
1993 and 1998, Moody's and rival Standard & Poor's required all companies
with commercial paper programs to fully back them up with alternative financing.
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- But because the U.S. economy was doing so well, and the
credit markets were friendly, the rating agencies relaxed their standards
for top-quality "Tier-1" issuers such as GE Capital.
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- "Depending on what each company negotiates individually
with rating agencies, that's what dictates how much backup there is"
now, she said.
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- Scott Sprinzen, an S&P managing director in corporate
ratings, said S&P never required all companies to fully back up their
commercial paper, but did in 1999 propose to companies that rather than
back up all of their commercial paper, they back up only that maturing
over given time periods.
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- GE Capital has backed up barely one-fourth of its commercial
paper, for example, even as another big lender, Household International
Inc.'s <<aol://4785:HIHI.N Household Finance arm, has fully backed
up its $10 billion commercial paper program.
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- Arner, who said Moody's policies have evolved since the
mid-1990s, said companies can reassure investors best by demonstrating
a "program to exit the market in an orderly way," such as by
holding large amounts of cash, generating strong cash flow, and having
high-quality backup credit lines.
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- As the importance of this grows, providers of those lines
could grow more demanding, he said, and that could hurt companies' bottom
lines.
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- "The terms and conditions, pricing and availability
of external credit facilities is a moving target," said Arner.
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- FINDING MY "RELIGION"
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- There's more to it than that, though, according to Bentley
Myer, who invests $2 billion of commercial paper for William Blair &
Co. in Chicago.
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- He makes a distinction between big lenders with hard
assets, such as a GE, whose operations include aerospace and the making
of appliances and light bulbs, or a Ford Motor Co.
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- F.N, which makes cars, and finance companies such as
a Household, or an American Express Co. <AXP.N.
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- "At the parent levels, the former are selling cars,
they are selling jet engines, and they have operating assets that could
be collateralized in case bankers demand it," he said. "What
does American Express have -- its receivables? Companies that don't have
hard assets to back up their financing should be forced to have a more
conservative structure in place to back up its commercial paper."
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- More companies and investors may come around to that
view.
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- "For all companies, we're now looking very closely
at near-term liquidity, whatever the rating level," said Sprinzen,
who said S&P heightened its scrutiny late last year.
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- Moody's Arner said "it is almost certainly true
that the alternative liquidity is less robust than it has been historically.
But I have to tell you, people are getting religion. Issuers and investors
are being more careful right now."
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