News analysis – GE Capital – portfolio play

In a presentation on 20 May, General Electric chief executive, Jeff Immelt, confirmed a widely held impression; the sale of GE Capital has gained considerable momentum in a short period of time. Immelt said that the company’s initial forecast of sales of $90 billion by the end of the year is now expected to reach $100 billion with the disposals completed next year, rather than 2017 as first forecast by the vendor. 

Immelt said there had been more than 450 inbound enquiries related to the sale and that $20 billion to $30 billion of disposals should be completed in the second quarter. 

He didn’t identify which parts of GE Capital he was referring to, but in the US, it is the $16 billion sponsor finance unit that has attracted most interest from private lenders. That business line has relationships with more than 300 private equity sponsors and includes GE Antares, which many consider the jewel in the crown. 

Apollo, Ares, Blackstone’s credit unit GSO Capital Partners, KKR, Macquarie, Mitsubishi UFJ and SunTrust Bank were all named as potential bidders in press reports last month. And the Wall Street Journal reported that GE had required bidders to sign a non-hire agreement, restricting them from hiring undefined ‘key employees’ even if they were already in talks or it wasn’t the bidder who made the first approach. 

Banking is a people as much as an asset business and former GE Capital employees are already popping up all over the place including several at Golub Capital. So while it’s unlikely any court would enforce GE’s ban on hiring by bidders, the chilling effect should help the sale process. 

The sponsor unit is up for sale as a going concern, rather than a portfolio disposal which is how GE sold off the bulk of its real estate assets with around $23 billion sold to Blackstone and Wells Fargo and another roughly $3 billion sold to an undisclosed buyer. 

COST OF CAPITAL

However, market observers say it is the assets and not the business that most of the non-bank bidders are interested in. GE Capital, part of an AA-rated conglomerate, is financed with cheap wholesale funding so its cost of capital is much lower than most of the bidders. 

And cost of capital, along with the regulatory burden of GE’s systemically important financial institution designation, is why the business is on the block. At the end of 2013 GE Capital’s cost of capital was roughly 240bps, according to a presentation by the firm. Jeff Immelt’s 2014 shareholder letter said the conglomerate had €83 billion invested in GE Capital and explicitly acknowledged that the finance unit’s returns were below the group’s cost of capital. 

PORTFOLIO PLAY

So while GE may want to sell the sponsor finance business as a going concern, tapping into the strong interest to boost returns, that may not make sense for many of the potential buyers.

GE has successfully sold business lines. It listed its US consumer finance business Synchrony which has since grown significantly in value, profits that GE plans to take as it sells down its remaining stake. It also sold off its Australian and New Zealand consumer finance business for two times book earlier this year. 

But for the non-bank potential buyers of the US sponsor finance unit, the assets and the instant relationship that come with them, are the attraction. Taking on whole teams with all the back-office functions can’t be very attractive. Buying the assets and hiring specific executives separately would be more cost effective. 

To even be competitive as buyers, funds will likely have to team up with a financial institution such as an insurer or bank. Ares is rumoured to have done just that; it is said to be co-operating with Macquarie on its bid for the $16 billion sponsor unit.

THE BIGGEST CLO EVER

And when they buy those assets, some market observers argue that it will sprout a whole cottage industry of securitization. Most of the bidders are already active in CLOs. They could buy the assets and get the relationship benefits but with such a capital intensive purchase, leveraging, repackaging and selling them on would be a natural solution, one source said. 

Whether the CLO scenario plays out remains to be seen. But with plenty of momentum behind the process, we should find out who the winning bidder is before the summer is out.