GE Capital Plans Subordinated Debt Ahead of Fed Rules

General Electric Co.’s finance arm is marketing $2 billion of subordinated debt for the first time since 2005 as it prepares to be regulated by the Federal Reserve.

The notes from General Electric Capital Corp. are expected to be counted as so-called Tier 2 capital, said Russell Wilkerson, a company spokesman. The 10-year debt may yield 162.5 basis points more than similar-maturity Treasuries, said a person familiar with the transaction.

GE Capital, which will be overseen by the Fed under the Dodd-Frank regulatory overhaul set to take effect in July, plans to raise $25 billion to $30 billion of long-term securities this year. The unit boosted its estimated Tier 1 capital ratio, a measure of the ability to absorb potential losses, to 8.9 percent in the fourth quarter from 7.5 percent a year earlier, according to a presentation last month to investors.

“What we’re seeing is the company getting its ducks in order for its capital ratios for when it becomes regulated by the Fed,” said Adam Steer, a senior analyst in New York at research firm CreditSights Inc. “They have no need outside of this for subordinated debt. It’s a result of Dodd-Frank.”

The unit of Fairfield, Connecticut-based GE expects the sale to “further strengthen our total risk based-capital, providing further flexibility in capital allocation decisions,” Wilkerson said.

‘Attractive Environment’

Tier 1 capital includes securities such as common stock while Tier 2 incorporates a broader range of securities that are used if an institution becomes insolvent.

GE Capital issued $6 billion of senior unsecured bonds on Jan. 4 in the biggest corporate debt offering in 11 months, according to data compiled by Bloomberg. The company has raised about $8 billion toward its 2011 goal, Wilkerson said.

“We believe this is an attractive environment in which to issue, and there will be strong demand from investors for this type of transaction,” he said.

GE Capital’s January sale included $2 billion of 4.625 percent, 10-year debt that priced at 99.62 cents on the dollar to yield 135 basis points more than similar-maturity Treasuries, Bloomberg data show.

The notes traded yesterday at 98.5 cents on the dollar to yield 4.8 percent, or a 116.8 basis-point spread, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

‘Capital as Cheap’

The offering “suggests that GE views Tier 2 capital or subordinated capital as cheap,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “Given the demand for cash in the marketplace right now, I think the notes will be received pretty positively, especially since they’ll yield above the senior debt.”

Today’s notes are expected to be rated Aa3 by Moody’s Investors Service and AA by Standard & Poor’s, said the person familiar with the offering, who declined to be identified because terms aren’t set.

The bonds will rank pari passu with the company’s existing subordinated notes including euro-denominated portions of debt due 2035 and securities maturing in 2037, the person said.

Barclays Capital, Citigroup Inc. and Goldman Sachs Group Inc. are managing the sale, the person said.

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