Things in the $1.7 trillion Commercial Paper (CP) market have not been great in recent weeks. These month-long loans are suddenly costing CP issuers much more than they have in the past -- for instance on Monday CP rates rose 1.71 percentage points to 3.95%. And during normal CP markets, issuers replace their old loan with new ones -- it's called rolling over the loan. But what if an issuer went to roll over its CP and nobody was willing to play any more? Then the issuer would need to come up with the money from some other source -- and in a big hurry.
This problem is spooking General Electric Company (NYSE: GE) and other companies in the CP market. GE has $90 billion worth of CP and it could be in trouble if it can't roll it over. By the end of today it should have a total of $34 billion in cash. How so? Yesterday it raised $3 billion from Warren Buffett and it expects to sell $12 billion in common equity this morning -- at $22.25 a share, which is a 9% discount to yesterday's closing price and the same as the strike price of Buffett's GE warrants. (By diluting current shareholders at a below market price, this high cost of capital signals trouble.) GE reported $19 billion in cash at the end of June.
This $34 billion leaves GE $56 billion in the hole if it needs to replace all $90 billion of its CP. The New York Times interviewed anonymous analysts who said GE has enough cash on hand to make up this $56 billion -- possibly from credit lines with banks which represent money that could be borrowed in the event of an emergency. Many consumers with home equity lines of credit have found that they can't get the cash when they want it.
I am curious whether GE really has $56 billion or more in those credit lines, and if so, has GE drawn those down? If not, would its banks be more forthcoming with the cash when GE comes calling than it has been with consumers? It would be helpful for investors if GE could provide more details about how it would come up with enough funding to cover a loss of $90 billion worth of CP.
Update 1. GE shares are down 9.5% to $22.17 in early trading -- below the reported $22.25 per share price of its common equity offering. At this price, Warren Buffett's $22.25 warrants are worthless. But he is betting that GE shares will come back over the next five years.
Update 2. GE's Russ Wilkerson e-mailed to point out that GE has $62 billion in lines of credit. To quote the e-mail, "we continue to fund without disruption and at prices significantly below Libor. We have not drawn do[w]n on any bank lines." This sound like good news to me. I hope GE can continue to obtain this financing and that it has a solid backup plan.