March 9 (Bloomberg) -- General Electric Capital Corp., the finance arm of General Electric Co., is selling $8 billion of U.S. government-backed bonds as debt investors speculate the finance unit will need to raise more capital.

Citigroup Inc., Credit Suisse Group AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley are arranging the sale, which will be backed by the Federal Deposit Insurance Corp., according to an e-mail sent to investors. Deutsche Bank AG, HSBC Holdings Plc and Royal Bank of Scotland Group Plc are also helping with the issue.

“The market is going to remain heavily dominated by government-guaranteed paper for many more months as people are scared of corporate defaults and the lack of liquidity in non- guaranteed bonds,” said Guthrie Williamson, a Sydney-based money manager with Principal Global Investors, which oversees $198 billion.

General Electric shares fell below $6 last week for the first time since December 1991 on concern that GE Capital may need more cash amid rising credit-card delinquencies and $4 billion in unrealized property losses. Credit-default swaps on GE Capital have been trading as if the unit were rated below investment-grade, even as GE Chief Financial Officer Keith Sherin said March 5 it had $45 billion in cash, he sees no need to raise additional capital and GE’s financial services businesses expect to be profitable in the current quarter and year.

Yields Over Benchmarks

GE Capital’s $4 billion of two-year, fixed-rate notes may price to yield eight basis points more than the benchmark mid- swap rate, and its $1 billion of two-year, floating rate notes may float at eight basis points over the three-month London interbank offered rate, according to a person familiar with the sale who declined to be identified because terms aren’t set.

The company’s $1.5 billion of three-year, fixed-rate notes may price to yield 20 basis points more than the mid-swap rate, and its $1.5 billion of three-year, floating-rate notes may float at 20 basis points over three-month Libor, the person said.

Libor, a borrowing benchmark currently set at 1.31 percent. A basis point is 0.01 percentage point.

Bonds guaranteed through the FDIC’s Temporary Liquidity Guarantee Program are rated Aaa by Moody’s Investors Service and AAA by Standard & Poor’s, their highest classifications. The FDIC in October agreed to guarantee three-year senior unsecured bank debt issued through June 30 as part of a U.S. Treasury plan to stimulate lending. The program has since been extended to debt issued through Oct. 31.

Refinance Maturities

“We are in the market for a benchmark deal under TLGP,” said GE Spokesman Russell Wilkerson. “Proceeds will be dedicated to meeting 2009 debt maturities.”

GE plans to refinance $45 billion in maturities this year, and has already sold more than 70 percent of the debt required to do so, the company said last week.

General Electric rose 52 cents, or 7.4 percent, to $7.58 as of 1:58 p.m. in New York Stock Exchange composite trading.

Credit-default swaps on GE Capital fell 2.5 percentage points to 12 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $1.2 million initially and $500,000 annually to protect $10 million of the company’s bonds from default. The contracts reached a record 20 percent upfront last week as traders demanded as much to protect GE Capital bonds from default as building materials-maker Louisiana-Pacific Corp., which posted nine straight quarterly losses.

‘Delphic Oracle’

“I just don’t think we should treat credit-default swaps as like the Delphic Oracle of any kind,” GE Chief Executive Officer Jeffrey Immelt said in a March 5 interview. Traders in the market can force substantial moves in the contracts “by spending 25 million bucks in a handful of transactions in an unregulated market. It’s the most easily manipulated and broadly manipulated market that there is.”

Credit-default swaps, which are used to hedge against losses or to speculate on a company’s ability to repay its debt, pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. The contracts typically rise as investor confidence deteriorates and fall as it improves.

Stamford, Connecticut-based GE Capital has raised more than $27 billion from government-guaranteed bond sales since December, according to data compiled by Bloomberg. It is offering to buy back about $1.45 billion of debt as it petitions bondholders to amend a covenant in the securities that limits the unit’s ability to pledge property or assets to secure debt without having to secure the notes.

‘Strong Liquidity’

GE Capital plans to repurchase fixed- and floating-rate notes in 29 issues ranging from $10,000 to $450 million, it said in a March 5 prospectus. The amendment will “provide the company with broader financing capability,” it said.

The company “has strong liquidity for 2009, largely because of its access to government programs,” Barclays Capital analysts led by Jonathan Glionna in New York said in a report.

Moody’s said Jan. 27 that it’s evaluating whether to lower GE’s Aaa rating, a review that typically takes about 90 days. Bonds ranked below Baa3 by Moody’s or less than BBB- by Standard & Poor’s are considered high-yield, high-risk, or junk.

GE Capital in January sold $4.5 billion of 2.2 percent FDIC- backed bonds at 116 basis points more than U.S. Treasuries, Bloomberg data show. The securities maturing in June 2012 were quoted at 79 basis points over the benchmark today, according to Pershing LLC prices.

To contact the reporters for this story: Patricia Kuo in Hong Kong at pkuo2@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: March 9, 2009 14:22 EDT