Investors including Nuveen Asset Management, Fidelity Investments and Capital Group Cos. are ratcheting up pressure on General Electric Co. to compensate them for a $5 billion securities swap they say left them shortchanged.
The firms and other holders of the preferred shares, hybrid securities with elements of debt and equity, are interviewing law firms and preparing to challenge GE’s valuation in an effort to recover losses, according to people with knowledge of the discussions. GE’s finance unit exchanged the shares last week for similar securities issued by the parent as the company seeks to shed the unit’s too-big-to-fail label.
At issue is whether the swap, which didn’t require the investors’ consent, gave them new securities of equal value. Investment bank Houlihan Lokey Inc. was hired by GE to make that assessment, people with knowledge of the matter said, who asked not to be identified, because the information isn’t public. JPMorgan Chase & Co. has been assisting GE in all transactions related to the reorganization of GE Capital, including the share swap, one of the people said.
“There’s clearly been an economic harm to investors,” said Eric Chadwick, the president of Flaherty & Crumrine Inc., which holds the preferreds. “Biggest difference between this and other exchanges is that this is coercive.”
The company is “listening to what our investors have to say,” Susan Bishop, a GE spokeswoman, said. A spokesman for GE said last week that the company “followed a thorough process in approving the new terms, and we believe shareowners are getting a fair value for their existing shares.”
Representatives of Houlihan Lokey, JPMorgan, Nuveen, Fidelity and Capital Group declined to comment.
GE intended the exchange to be "fair and equitable" and was surprised by the market’s reaction, according to Phil Jacoby, chief investment officer of Spectrum Asset Management, whose firm had conversations with the company to express its disappointment. At this time, it seems that GE intends to offer no remedy and is preparing for a fight, he said in a Dec. 9 note.
The industrial giant is shedding the bulk of its GE Capital unit as part of a dramatic overhaul of its lending business as it prepares to ask U.S. regulators to drop its designation as a systemically important financial institution. Chief Executive Officer Jeffrey Immelt is selling about $200 billion of finance assets and taking the company back to its industrial roots.
The securities swap is part of that reorganization. GE is exchanging three different series of preferred shares for similar securities that pay smaller coupons through 2022, when the notes can be retired by the company. However they exchanged them at a premium to face value to compensate for that lower interest rate. Once the notes become callable in 2022, they’ll also pay a lower floating rate than the old notes, which investors argue reduces the incentives for the company to redeem them.
While the company has been telling bondholders individually that they intend to retire the notes in 2022, the people said, the investors are skeptical.
"Nobody knows how the world, or GE for that matter, is going to look like in seven years," said Jesse Rosenthal an analyst at debt-research firm CreditSights Inc. "What if there’s another global financial crisis in 2022 and GE needs to keep them outstanding?"
Investors who have huddled on calls in the last week are giving notice to GE that they intend to get the value of the notes assessed in a Delaware court, the people said. The bondholders are scheduled for another call with at least two law firms on Friday, one of the people said.
As investors lobby for concessions, the market value of the old securities have plunged, and the new securities are trading at less than their face value.
One of the old notes, $2.25 billion of 7.125 percent securities that had been trading at about 119 cents on the dollar as recently as Dec. 1, have since dropped to 112 cents. One of the new shares, $2.78 billion of securities paying a 4 percent coupon, traded at 91 cents on Wednesday. After the 2022 call date, the new securities would pay 2.3 percentage points more than benchmark rates if the company doesn’t redeem them. That compares with a 5.3 percentage-point premium the company would have had to pay on the old securities.
"What GE has not established is a level of risk/reward for investors should the new notes not be called," Don Jones, an analyst at Amherst Pierpont, said in a report last week.