UPDATE 2-GE CDS spreads show irrational liquidity fears: analyst

jueves 18 de septiembre de 2008 13:19 CEST

(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: Cotización), 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.   Continuación...