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Posted

I picked up GE 2011 7.50 leaps this morning when the stock was at around 6.00.  GE has a book value of $10/share (Reuters), 10.50 (BMO).  Even if I impair it by 30 B, on par with the worst of the worst, it is still trading at BV.  There is no indication that GE has anywhere near 30 B in writedowns coming.  The .80 per year dividend savings puts 8 Billion of Cash flow back on the balance sheet.  The biggest mistake Immelt made IMO was not to cut the dividend 3 months ago.  He should have just stated that we need to save capital and done it. 

 

Absurdly cheap. 

Posted

There is no indication that GE has anywhere near 30 B in writedowns coming. 

Absurdly cheap. 

 

"On the asset side, a big source of jitters is GE Capital's $36.7 billion in commercial-real-estate investments. These are equity-type investments, the first to absorb any losses. As a result, most firms are currently applying big haircuts to this type of asset.

 

In its fourth quarter, Goldman Sachs Group, using mark-to-market accounting, took a 25% write-down, totaling $961 million, on its commercial-real-estate equity investments. GE Capital, which values its holdings using estimates of future cash flows rather than marking them to market, took $300 million of impairments last year, equivalent to less than 1% of the equity investments...  since GE was a big commercial-real-estate equity investor in the frothy years -- it added $12.6 billion of these assets in 2007 alone -- investors should watch this portfolio very closely.

 

Attention should also be paid to GE Capital's $59.6 billion of overseas residential mortgages, many of which are based in troubled markets like the U.K. Some $3.3 billion of these mortgages are more than 90-days past-due, but GE Capital's loan-loss reserve is equivalent to only 11.5% of the past-due total, up only slightly from 10% at the end of 2007."

Posted

My concern is what effect any write-offs would have on debt convenants.  When you add in the possibility of downgrades then I can see how this could snowball.  Debt in this environment can cause any company a whole lot of pain.

 

Posted

Ucc,

 

This morning, I bought the GE 7.50 strike as well, but bought shorter maturing option - Jan 10 or Sept 09 - can't remember.

 

Looked too cheap.  I have not done any dd but the simple argument that the core operations have value and the government is giving GE access to commercial paper for GE capital which means they can take losses as they arise and stay solvent in the meantime.  To me, this means bankruptcy is likely not possible in which case the profits from the core operations will fill the holes from the losses in GE capital for a few periods and then normal core profits will resume.

 

That's about all the dd I have done.

Posted

From GE's latest 10-K

 

The commercial real estate business consists of a real estate investment portfolio, a real estate lending portfolio, and a single tenant financing portfolio. The real estate investment and lending portfolios are global and consist of approximately 8,000 individual properties in 2,600 cities in 31 countries with an average property investment of under $10 million.

 

Our real estate investment portfolio includes approximately 3,200 properties located in 900 cities and 22 countries, with 71% of this portfolio outside the U.S., primarily located in Europe, the U.K., Asia, Canada and Mexico, across a wide variety of property types including office, industrial/warehouse, and multifamily.

 

Our real estate lending portfolio is secured by approximately 4,800 properties in 1,900 cities and 25 countries, with 44% of the assets securing this portfolio located outside the U.S., across a wide variety of property types including office, multifamily and hotel.

 

The single tenant financing portfolio has approximately 4,200 properties in 1,360 cities in the U.S. and Canada, and an average loan size under $3 million.

 

Mortgages represent 43% of the total consumer portfolio. The average loan-to-value (LTV) at origination of the total global mortgage portfolio is approximately 74%. Western Europe, Australia and New Zealand, Ireland and the U.K. account for approximately 80% of the mortgage book. GE employees underwrite all mortgages and originate to hold all mortgages on book. We exited the U.S. mortgage business in 2007.

 

The U.K. mortgage business tightened underwriting criteria throughout 2008 and reduced volume by 54% in response to the weakening home price environment in the U.K. Since mid-2006, the first mortgage loans originated in the U.K. that were greater than 80% LTV are covered by private mortgage insurance for the mortgage balance in excess of 80%. Insured mortgages account for approximately 73% of the portfolio above 80% LTV at origination.

 

The Australia/New Zealand mortgages are generally prime credit, and 94% of the portfolio is covered by private mortgage insurance for the full amount of the mortgage, which is customary in this market.

 

The French mortgage portfolio is generally prime credit, and 29% is insured for mortgage loans greater than 80% LTV (for the mortgage balance in excess of 80%)

 

--- Diversification, many, many small properties/loans and some mortgage insurance should help mitigate losses...with GE holding the notes, I believe they could re-structure notes if they choose to do so.

 

Disclosure - I'm long GE...

 

 

Posted

I think the market has more than priced in some significant writedowns.  As for the debt covenants and the credit rating, I am thinking that these are not particularly relevant in the present climate.  Everyone gets to pay a higher rate regardless of their credit quality. 

 

Unlike most other major finance companies GE has real live businesses backing it.  Businesses that create alot of jobs.  As stimulus money starts to flow those real live businesses are going to have ready financing for many huge projects. 

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