Oct. 24 (Bloomberg) -- General Electric Co., the biggest U.S. issuer of commercial paper, plans to use the Federal Reserve’s new short-term funding facility, throwing its weight behind the central bank’s efforts to unlock the credit markets.

GE and its General Electric Capital Corp. finance arm registered as users of the Fed’s Commercial Paper Funding Facility, spokesman Russell Wilkerson said yesterday in a telephone interview. The company hasn’t set an amount that it plans to borrow and will base that decision on commercial-paper buyers’ need for liquidity, he said.

“This is a way for us to demonstrate our support for what the Fed is doing, which is providing all-around liquidity,” Wilkerson said.

The Fed is seeking to stem the credit-market seizure and revive demand for commercial paper, short-term debt that companies use to finance their day-to-day operations, by offering to buy 90-day debt of top-rated companies. By selling paper to the Fed, Fairfield, Connecticut-based GE may ease any stigma for other potential borrowers in the program and boost liquidity in the market by encouraging investors to buy debt of lower-rated companies.

“There is a role for us and other large issuers to play here in demonstrating that this action is good for the market and very important for the buyers of GE paper as it provides a secondary market,” Wilkerson said.

Market Rout

GE declined 97 cents, or 5.2 percent, to $17.83 in New York Stock Exchange composite trading at 4:02 p.m. amid a broad decline in U.S. markets. The shares have lost 52 percent so far this year.

The central bank this week also said it would provide as much as $540 billion in loans to money-market funds, the biggest buyers of the debt. Companies cut back their short-term borrowing for the sixth-straight week, the Fed said yesterday, as investors balked at taking on the debt.

“We are encouraged that many issuers have already registered in the program because that provides a signal to investors of greater liquidity support to this key financing market,” said Andrew Williams, a Fed spokesman in New York.

As the credit crisis escalated this month, investors were only prepared to buy overnight commercial paper, forcing companies to return to the market for financing each day. Some including Gannett Co. and Southern Co. were forced out of the market. The Fed’s plan is designed to free up cash to entice money market funds to buy more of debt at longer maturities.

Commercial Paper

Outstanding commercial paper slumped $61.5 billion to a seasonally adjusted $1.45 trillion for the week ended Oct. 22, the lowest since April 2005, the Fed said yesterday. The market has shrunk by $366 billion, or one-fifth, since Sept. 10, the biggest decline on record.

General Electric has been able to sell commercial paper uninterrupted throughout the crisis, Wilkerson said.

Chief Financial Officer Keith Sherin told investors Oct. 10 that GE, the world’s biggest maker of jet engines, power-plant turbines, medical imaging equipment and locomotives, was studying the terms of the plan, even though the company didn’t need help financing itself. GE Capital, the finance arm, is eligible for as much as $60 billion under the facility. GE could borrow $10 billion, Sherin said.

Encourage Buying

“To ensure access and operability and to demonstrate our support for the Fed’s action, we plan to test the facility,” GE said in an e-mail to investors yesterday. “We believe the CPFF will strengthen confidence in the prime commercial paper market and encourage more term buying.”

The Fed is setting up the special fund to buy commercial paper, and will start the program on Oct. 27. The U.S. Treasury will make a $50 billion deposit into the fund as an indication of support. The Fed said the maximum amount of commercial paper that could be funded by the facility is about $1.8 trillion.

The central bank will buy only debt with at least two of the top short-term ratings of A-1, F1 and P-1 given by Standard & Poor’s, Fitch Ratings and Moody’s Investors Service respectively. S&P and Fitch also offer ratings of A-1+ and F1+, one step higher. The facility provides for 90-day borrowing which may help lengthen the time periods for which liquidity is available.

GE’s use of the Fed’s program may create more opportunities for lower-rated companies to borrow from investors. Companies such as Computer Sciences Corp. have tapped bank credit lines amid a dearth of buyers for the day-to-day funding. Because Falls Church, Virginia-based Computer Sciences is rated below the A- 1/P-1 requirement, it isn’t eligible for the Fed financing.

American Express

New York-based American Express Co., the biggest U.S. credit-card company, said this week that it could meet its needs in part by using the facility. American Express is rated A- 1/F1/P-1.

Insurer Torchmark Corp. has registered to sell as much as $300 million of commercial paper in the program and plans to start issuing the debt next week, Chief Financial Officer Gary Coleman told analysts on an Oct. 23 conference call. Coleman said he expects the program will cut the McKinney, Texas-based company’s commercial paper rates by half to 3 percent. Torchmark is rated A-1/F1/P-2.

Using the Fed facility may give GE Capital cheaper financing initially, though it could prove more expensive if the Fed succeeds in lowering commercial paper yields in the broader market.

GE’s Rates

GE, and other borrowers who do not post collateral, would pay 2 percentage points plus the overnight indexed swap rate, currently 0.9 percent, to sell debt under the Fed Facility, according to the company’s Web site. That compares with a current average rate of 3.48 percent for the top-ranked financial companies, according to the central bank as of yesterday. Financials paid 3.95 percent a week before the program was announced. GE Capital, the company’s finance arm, today posted an offering rate of 3.1 percent on its paper maturing in 90 days.

“We think GE probably will access the Fed’s CP funding facility given the rates wouldn’t differ much from what GE is currently able to achieve,” said Robert Cornell, an analyst at Barclays Capital in New York, in a note to investors yesterday. He rates the company “overweight.”

GE’s finance division, which accounted for about half the company’s profit last year, includes aircraft leasing, private- label credit cards, real estate, mid-market company financing and bankruptcy lending.

GE Capital Balance

GE Capital will probably have a commercial-paper balance of about $75 billion in 2009, less than the $80 billion forecast for the fourth quarter, Sherin said on the call. Access to about $20 billion in cash from its finance businesses brings its net balance below its $62 billion in bank lines, he said.

Results at General Electric’s large industrial divisions and NBC Universal media units have been overshadowed by investor concern about the future of GE Capital, which posted profit of $2 billion in the third quarter and is forecast to reach $9 billion in 2008 in contrast to losses posted by other finance companies.

GE Chief Executive Officer Jeffrey Immelt moved to shore up cash Oct. 1, deciding to raise $12.2 billion from selling common stock and $3 billion by selling preferred shares to Warren Buffett’s Berkshire Hathaway Inc.

To contact the reporters on this story: Rachel Layne in Boston at rlayne@bloomberg.net To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net

Last Updated: October 24, 2008 16:23 EDT