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(Adds analyst's comments, background)
Sept 18 (Reuters) - The cost of insuring the debt of General Electric Capital Corp, the finance arm of General Electric Co (GE.N), has widened to unprecedented levels indicating heightened liquidity fears, but these fears appear "irrational," an analyst at Deutsche Bank said.
With $150 billion of short-term debt, including $98 billion of commercial paper programs at the end of second quarter, the market has a right to be concerned about ongoing access to the capital markets and attendant cost of capital, analyst Nigel Coe said.
However, this fear largely ignores the historical stability of GE Capital's business model, Coe wrote in a note to clients.
Credit default swaps (CDS) insuring GE Capital's debt jumped 110 basis points to 500 basis points on Wednesday, according to Markit Intraday, amid continuing concerns over the health of financial companies.
"This market only cares about liquidity and so CDS spreads are a real concern," Coe said.
"For this reason, we would be surprised if GE did not take proactive steps towards de-levering GE Capital balance sheet..., which could be accomplished via a cut in GE Capital dividend repatriated to the parent and/or a commitment to slower/no financial asset growth," he added.
GE Capital will likely cut its payout ratio from 40 percent to zero, and still leave GE adequate headroom to maintain its current dividend, Coe said.
"The underlying business model for GE Capital remains sound but it is becoming clear that the earnings headwinds for next year are growing," he added.
Over the past week, GE has lost about 17 percent of its market value, or $46.7 billion, as the bankruptcy of investment bank Lehman Brothers and a U.S. government bailout of insurer American International Group Inc (AIG.N) spooked investors.
GE shares have sold off as investors worried that the trouble at Lehman, AIG and other large financial services firms may be a warning sign about GE Capital.
GE itself faces several challenges, including deteriorating GE Capital asset quality, rising tax rate and dilution from divestitures, over the next 12 months, Coe said.
Still, GE is one of the "...highest quality companies in the industrial sector with organic growth rates (ex-financial), at the high end of sector averages and margins well in excess of peers," he added.
The analyst cut his price target on GE stock to $28 from $33. He maintained his "hold" rating on the stock. Shares of GE were up nearly 3 percent at $24 in trading before the bell Thursday, after closing at $23.39 Wednesday on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)