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GE’s Divestitures Will Shrink Commercial Paper Market

By year's end, treasurers and other investors will have a smaller supply of highly rated commercial paper and short-duration corporate debt to inve...
GE’s Divestitures Will Shrink Commercial Paper Market

Here are some groups not looking forward to General Electric cleansing its balance sheet of most of the remaining assets of GE Capital: money-market funds, institutional investors, and corporate treasurers who invest directly in highly rated corporate debt.

Why? A much smaller or nonexistent GE Capital will bring a considerable reduction in GE’s wholesale funding needs. Translation: a smaller market for investors who buy direct-issue commercial paper to earn a return on their short-term cash. In fact, it will be considerably smaller: the GE moves are expected to cause a 23% drop in the supply of high-quality commercial paper.

“As much as GE’s divestiture may be a positive credit event [for the company], it also means that the available pool of highly rated and liquid corporate debt will shrink further in size,” wrote Lance Pan, direct of investment research at Capital Advisors Group, in a client note last week. “New financial regulations and issuer rating downgrades already present challenging supply-demand imbalances in the cash market.”

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Pan said the exit of a high-quality issuer results in incrementally less liquidity, “accelerating a trend which has been worsening in recent years.”

But GE is not just any high-quality issuer. As of April 24, according to Pan’s numbers, the combined GE and GE Capital was the largest direct commercial paper issuer, representing 41% of the total CP outstanding. “Assuming that GE Capital’s balance is reduced from $22 billion on this day to $5 billion by year-end, and holding GE’s $8.2 billion and the rest of the market’s balances constant, the direct CP issuers market will shrink by $17 billion, or 23%, in the next eight months,” Pan estimates.

Short-duration corporate bond investors will also feel a supply squeeze, according to Pan. With a downsized balance sheet, GE has said it is not planning any net new term debt issuance for five years. The estimates are that GE’s net debt outstanding will drop from $274 billion to an estimated $70 billion in 2019. “Liquidity needs, likewise, will drop from $76 billion to $20 billion,” Pan said.

A potential offset to the drop in the supply of short-duration credit instruments from GE, Pan said, is the possiblity of GE assets landing on the balance sheets of other high-grade issuers, like Wells Fargo. “If a significant portion of [GE’s] disposed assets end up in the hands of other high-grade credits, more issuance may come from these entities,” Pan said.

Another “mitigating factor” are the money market reforms taking effect in October 2016. The regulatory changes are expected to push some institutional investors and corporate treasurers into government money market funds from prime funds, thus the “demand for corporate paper may slack off to alleviate some of the market imbalances,” according to Pan.

GE plans to divest most of the assets of GE Capital. Of $500 billion in assets ($363 billion after netting of cash and deposits), GE plans on keeping about $90 billion to finance “verticals” related to its industrial businesses. The asset disposition will take about 24 months, Pan said.

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