With the fall of Enron and the rise of investor awareness, General Electric Capital Corp has been forced to put transparency at the heart of its fundraising, a strategy made more urgent in March when Pimco's Bill Gross launched a damaging attack on the size of its CP programme. In an exclusive interview with EuroWeek, GECC's Kathy Cassidy and Kitty Yoh tell Danielle Robinson how they are adapting to the new corporate climate. Not so long ago, investors hardly gave a second thought to buying GECC bonds. Satisfied with the triple-A rating and impeccable track record of the US conglomerate's funding arm, investors would spend more time analysing the fundamentals of lower rated corporates.
That is, until Enron's spectacular demise and the rapid descent of more than $30bn of once investment grade telecoms debt into junk status.
Now, no one is immune to investors' heightened anxieties. Not even GECC. "This is a different market environment, no question," says Bill White, managing director and North American head of debt capital markets at Morgan Stanley in New York.
"When we have had such incredible credit blow-ups, investors are demanding a lot more information from issuers, and if you are going to be a wholesale user of the capital markets, like GECC, GMAC and Ford, you have to be transparent with investors."
Ultra-transparency is the market's new mantra and GECC, after a particularly difficult time in March, has embraced it with all the zeal of a fresh convert.
"We should start with the issue of financial transparency," says GECC treasurer Kathy Cassidy when asked how the markets have changed this year. "We have made efforts to take a more proactive stance with investors as well as bankers in the market. We took more time this year to think through our annual report than in the past and certainly we have been very keen to have our investors understand who we are and to answer any questions they might have."
GECC conducted its first ever non-deal European roadshow in May covering London, Paris, Frankfurt, Belgium and the Netherlands, and also held a conference call in which its treasury team provided the kind of details that investors crave.
Led by Cassidy, the treasury outlined GECC's much larger than usual funding requirements this year, breaking it down into the amount the company requires for paying down commercial paper, refinancing maturities coming due and asset growth.
Cassidy and her team also gave investors an insight into the different markets GECC has tapped so far, an idea of the markets it plans to tap in the rest of the year and an indication of the frequency and size of its issuance.
Investors were told that GECC was seeking to issue in new markets, such as retail notes and asset backed securities, to further diversify its investor base and help take pressure off the global dollar and euro markets.
The team assured investors that they would be mindful of bondholders' needs for aftermarket performance of GECC's new issues when determining the pricing, sizing and timing of deals.
"We have really gone out of our way in communicating our strategy," Cassidy says, "and we have worked very hard to meet with individual investors and groups of investors to make sure they understand what we are about."
Fruits of hard labour
So far, those efforts have paid off. At the end of May, GECC priced a blowout $6bn global issue of five and 10 year notes after attracting $9bn of orders - albeit at higher yields than it is used to paying.
Investors were keen to snap up the deal, even though they were aware at the time that GECC still had as much as $50bn worth of issuance to go before the end of the year and might return to the dollar market with two more jumbo globals.
The success of the transaction was borne out in aftermarket trading, where both bonds tightened in several basis points and continued to trade at their tighter levels in the following weeks.
"GECC outlined their strategy in unprecedented detail to investors," says White at Morgan Stanley. "Their level of transparency made this [$6bn] deal much easier to sell."
A week after the $6bn global, GECC issued a ¥200bn deal and this week it tapped both the euro and dollar markets, with a $6bn offering of floating rate extendable notes aimed at money market funds and a euro deal.
It is not that GECC did not want to be more transparent, it was just that it had no idea there was a greater need for it. Up until a few months ago, there was no indication that market participants did not have a complete understanding of its operations and funding strategies.
As Cassidy says: "Some investors bought our bonds based on just the rating and the name." She adds: "We were not getting complete coverage on the fixed income side, even from the larger US and European firms, which was rather interesting."
The rude awakening came in March, when GECC suffered a public lashing by Pimco's Bill Gross, who oversees $250bn of the fund management group's assets.
In an emotional and savage article posted on Pimco's website, Gross expressed outrage at the size of GECC's commercial paper programme and the fact that only one-third of it was covered by back-up lines of credit. He had been spooked by a Moody's liquidity assessment report released a few days earlier, as part of Moody's own attempts to be more vigilant.
In fact Moody's said in its report that any funding risk associated with GECC's partial back-up coverage was mitigated by explicit support from its parent General Electric, the inherent liquidity and diversity of the firm's portfolio, and strong market access. But the timing was poor - Gross's comments came in the same week that GECC filed a $50bn debt shelf.
Many investors were surprised by the size of the shelf, coming as it did just days after GECC issued a $11bn offering of three, five and 30 year global bonds on March 13, the biggest corporate dollar bond ever.
Fighting back
GECC and the big underwriters on Wall Street were baffled by the criticism. "Anyone who followed us knew we had tremendous growth in the fourth quarter but, because of September 11, we didn't come to the term debt market in the last part of 2001 and instead funded it through CP issuance," says Kitty Yoh, head of GECC's long term debt funding. "So do we have more debt to do this year than in the past? Yes, and we and others who follow us knew we had that overhang.
"It has always been our strategy to pay down the CP as soon as we came back to the markets in 2002 and you saw us in the market on January 2."
Bulge bracket bank analysts defended the company. They said it was common knowledge that GECC's CP programme had been running at around $100bn for some years and that the company, like many other US corporates, stayed out of the term debt markets in the last months of 2001 because of the traumas of the terrorist attacks.
Gross's comments caused spreads on its $11bn global deal to widen as much as 16bp that week. Seeing a bargain, investors quickly jumped in to buy up those bonds and they tightened in the following weeks to trade significantly inside their launch spreads.
Nonetheless, the upsets of March shocked GECC into action. General Electric's chief financial officer, Keith Sherin, issued a statement about GECC's funding strategy immediately after Gross's comments, saying that GECC was in the process of doubling its bank lines. It has since added a further $20bn to its back-up lines of credit.
He added that GECC would also reduce the level of its CP programme from 49% of its $240bn outstanding debt at the end of last year to 25%-35% by the end of 2002.
Cassidy's treasury team, meanwhile, decided to meet their critics head on with the kind of funding strategy commentary that investors rarely - if ever - receive from a US corporate, especially one as highly rated as GECC.
In roadshows and conference calls investors discovered that GECC had begun planning as long ago as last summer to double its CP back-up lines.
Cassidy and Yoh explained that its CP issuance had jumped to $117bn by the end of last year from its usual $100bn size because, in the aftermath of September 11, there was much more demand for short dated triple-A paper among investors. It was also more cost-efficient to issue CP, given the turbulent state of the term debt markets.
Because of the scare investors got from the planned size of its CP facility, GECC has decided to go beyond the usual $100bn programme size and steadily cut it down to around the $85bn range by the end of this year.
"We were on a path to take it down to where it was historically, which was roughly $100bn," says Yoh. "We will bring it down further than that as a result of the general concerns in the market. And that's OK. We are very comfortable with where we are going to be at the end of the day."
GECC began the year with $240bn of outstanding debt, which consisted of $117bn of CP, $110bn of long term debt - of which $31bn was in current maturities - and $13bn of retail and master notes.
At the end of the first quarter that breakdown had changed to $100bn in CP, $128bn in long term debt and $12bn in retail and master notes. And by the end of the year, expectations are that CP will have been reduced by $33bn to around $80bn-$85bn and term debt increased to around $156bn.
Normally GECC raises about $30bn-$40bn a year in the capital markets, but this year, because of its need to pare down CP to around one-quarter of total debt, it will end up raising a staggering $75bn-$95bn. Of that, $33bn will be used to reduce its CP programme, $31bn for amortisations and the rest for asset growth.
Investors were surprised to discover that GECC has already raised more than $54.5bn of its annual needs by the second week of June - a figure which includes the $6bn of floating rate notes, but not this week's euro deal.
"It helped to have investors realise how much debt we have already raised this year without really causing a splash," says Cassidy. "A lot of this is everyday business as usual and that's the way we are trying to keep it."
With so much debt left to issue, investors were naturally concerned about what markets GECC intended to tap, by how much and how often.
"I think investors were initially a little concerned that all the paper would come into one sector," says Yoh. "We have always diversified our sources of funding. So what we were telling them is that we intend to be very careful about how we do this so we don't overwhelm any one sector, and most of all that we are mindful of their need for spread performance and that we would allow the market to comfortably absorb any single deal."
GECC said it could potentially tap the euro market with two more deals (including this week's deal), and possibly issue two more dollar globals.
It also plans to issue bonds in the domestic Australian and Canadian dollar markets, and tap other currency markets as needed.
The company has always been a meticulous matcher of assets and liabilities and takes no interest rate or currency risk at the business level. The level of funding in any one currency is usually determined by its growth needs in that region, with the timing of issuance mostly dictated by market conditions.
Depending on the level of reverse enquiry deals it issues off its MTN programme, GECC might only need to return to the dollar market one more time this year. So far it has raised more than $13bn from reverse enquiry transactions in Europe and the US.
Untapped markets
Like Ford, GMAC and other heavy issuers of debt, GECC is also searching for new untapped sources of funds, such as the market for retail notes and securitisation. The treasury team thinks the market could comfortably absorb as much as $10bn-$15bn of GECC asset backed securities.
"We have only done retail notes to a limited extent in the past," says Yoh. "We don't have extensive retail note programmes set up like some other major borrowers have and that is something we are analysing right now. The important thing is to keep our options open. We will use all markets and it depends on what the receptivity and the demand is."
There is a price to pay for greater reliance on term debt markets. On a spread to swap basis, GECC was paying around 10bp over Libor for five year debt last year. The new $2.25bn five year global issued at the end of May came at a spread in the mid-30s over Libor, and then traded in to 28bp over.
Its five year was priced at 76bp over Treasuries when its outstanding five year paper was trading around 69bp; and its 10 year was priced at 106bp when outstandings were around 103bp.
Although the steepness of the curve can account for much of the extra spread, the outstanding five year had widened out to 69bp from a previous 64bp a few days earlier in anticipation of the extra supply.
GECC paid about a 5bp premium on the five year tranche of the $6bn deal, a concession that lead managers Bank of America, Credit Suisse First Boston and Morgan Stanley argue is appropriate given the size of the deal.
Extra supply
There is no escaping the fact, however, that GECC is paying up this year for the extra supply it is bringing into the dollar market.
"GECC basically trades where double-A rated banks trade," says one market participant. Citigroup, rated Aa1/AA-, has a March 2007 trading around 65bp, however, the steepness of the yield curve is such that a new Citigroup five year global would probably be priced in the 70bp-75bp area.
Some of that spread difference can be explained by the extra supply on GECC's side, and some by the significant distortion of spread differentials in the high grade market due to investors' desire for diversification and high quality infrequent borrowers.
In the first week of June, for instance, Procter & Gamble, rated Aa3/AA-, issued a five year global bond at just 50bp over Treasuries.
Paying the piper, however, is a lot easier to bear when it is only temporary, as in GECC's case. "Next year we will not be raising nearly so much in the term debt markets, so our spreads will come back in," says Yoh.
While funding requirements will be back to normal next year, GECC's new, more transparent relationship with investors is expected to remain. "We will take any opportunity to tell our story, because it is a good one," says Cassidy.
As one market participant says: "What they have learned is they have to continue to build their relationship with bond investors - and that is what is different. In the past they were more focused on equity investors, who have different issues that bond buyers."
