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GE's greatest strengthsits ability to deliver double-digit earnings growth consistently, expanding through acquisitions and its managementhave suddenly turned into its weaknesses. In the wake of investor disenchantment with corporate glory, as an aftermath of Enron et al., GE has landed at the center of the squall.
Even the world's most admired company is not spared of criticism. Bill Gross, one of the financial community's respected personalities, recently attacked General Electric (GE) for its heavy reliance on short-term debt or commercial paper (which stood at $103 bn). Gross, a bond-fund manager at world's biggest bond fund, Pacific Investment Management Company (PIMCO), announced that he would cease buying the commercial paper of GE, because its large exposure to short-term debt made it vulnerable to huge risk during each refinancing. He alleged it was a double whammy because it used cheap short-term loans to make long-term acquisitions. He accuses GE of inflating earnings through acquisitions and cheap debt rather than through organic growth.
Gross argues that GE is enjoying a triple-A bond rating even though its outstanding commercial paper is three times the size of its bank loans when normally the two should be equal. Credit analysis boutique Gimme Credit and rating agency Moody's Investors Services echo similar concerns that bank lines for GE's finance arm, GE Capital, back-up less than a third of its commercial paper.
Much of investor concern about GE centers on GE Capital, the fastest growing of GE's 12 businesses. More importantly, commercial paper accounts for about 42 percent of GE Capital's debt. Agreed that short-term debt is less expensive than long-term debt, but too much of a dependence on it can expose the firm to a sudden credit crunch.
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