Bonds sold by General Electric Co.’s finance subsidiary, one of the biggest issuers of investment-grade debt, rallied for a second day as investors showed approval of the parent company’s plan to back the unit’s bonds as it exits the bulk of its lending business.
The borrowing costs of GE Capital’s notes dropped to trade more in line with securities sold by the parent as the company said in an April 10 regulatory filing that it will extend guarantees to all of the unit’s debt obligations. The move comes as Fairfield, Connecticut-based GE focuses on its industrial divisions.
The finance arm accounted for half of GE’s earnings in the years leading up to the financial crisis as it built out its lending business. That expansion came at the cost of the conglomerate’s triple-A bond ratings after the collapse of Lehman Brother Holdings Inc. in 2008 raised the perceived risk of owning the finance unit.
“GE Capital bondholders were rewarded with an unconditional guarantee of all GECC debt obligations, the single-most important takeaway for investors” analysts at CreditSights Inc. led by Jesse Rosenthal wrote in an April 12 report. “The finance subsidiary’s bonds should be framed against other large multi-industrial conglomerates. Previously, GECC had been been measured against the large global banks.”
Yields on GE Capital’s $6.35 billion of 5.875 percent notes due January 2038 dropped to 3.73 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s inching toward the yield of 3.69 percent on GE’s $2 billion of 4.125 percent notes maturing in October 2042, Trace data show. That gap was as much as 0.7 percentage point in April 2013, the data show.