Pimco to Steer Clear of GE Debt
Bill Gross, manager of the world’s largest bond mutual fund, said Wednesday his Newport Beach-based Pacific Investment Management Co. will not own General Electric Co.’s short-term debt “in the foreseeable future” because GE has too much debt.
Gross said that GE and its GE Capital Corp. finance arm, the world’s largest issuer of short-term IOUs known as commercial paper, are borrowing too much at a time of shaken investor confidence in the integrity of corporate accounting after Enron Corp.’s collapse.
He also said he doesn’t believe that GE Chief Executive Jeffrey Immelt and predecessor Jack Welch have been “totally forthcoming” in explaining how GE has been able to post earnings growth of nearly 15% a year for decades.
GE said Monday it expects 17% to 18% earnings growth from continuing operations this year.
“The corporation’s honesty remains in doubt,” said Gross in his monthly “Investment Outlook” posted on Pimco’s Web site. “I want companies to face up to their owners and yes--their creditors.”
Gross said Pimco sold its $1 billion in GE Capital commercial paper in the last week, after the unit issued $11 billion in new long-term bonds and then filed to sell up to another $50 billion in securities.
The firm’s level of short-term debt “is an extreme situation that investors should rebuke and rebel against,” Gross said in an interview. “The sale of our paper was one small step in that direction.”
GE Capital spokeswoman Marissa Moretti declined to comment Wednesday on Gross’ report.
GE shares fell $1.10 to $38.80 on Wednesday on the New York Stock Exchange amid a broad market decline.
On Monday, credit-rating firm Moody’s Investors Service said GE Capital, one of no more than 10 U.S. companies carrying triple-A credit ratings, faces “funding risk” because it has backed up only one-fourth of its $127 billion in short-term debt with bank credit lines.
Moretti said the company is working to increase that amount.
Gross said General Electric’s earnings have been helped by GE Capital’s low-cost borrowing. The company has used the money in part to finance as many as 100 acquisitions over the last five years.
GE Capital is using “near-hedge-fund leverage” and “its survival depends on the confidence of outside investors,” Gross said.
Meanwhile Wednesday, GE spokesman Gary Sheffer rejected a published report sourced to unnamed persons that GE last month offered up to $8 billion to buy Tyco International Ltd.’s CIT Group commercial finance arm.
