GE Capital is trying to manage a big problem. the lending unit of the company prepared some nasty surprises, and with them, practically toppled the entire company.
The Chief Executive of General Electric was assuring investors, that the company is recovering thanks to the reorganization. However, some specialists on Wall Street don’t believe this statement and worry, that the trend with GE is not going to change.
The Chief Executive John Flannery explained, that the GE Capital wasn’t the central point in the restructuring plans. The lending unit of the company generated high revenues and was managing many things, among them overseas car loans and oil drilling ships. The department was generating more than a half of the company`s income, before the financial crisis hit. When that happened, GE Capital was the thing that practically sank the entire company.
Jeff Immelt, the former CEO of the company, sold most assets of the company. But as if that was not enough, he made some commitments, including a 15 billion US commitment to a business working in insurance field. The last fact was a huge surprise for everybody, even the senior executives and board members.
When Mr. Flannery, the current CEO, and his team were planning the further development options for the company, they also were confused with GE Capital and with the question what to do with it. The company now working with advisors and bankers in an effort to keep what is left and to reduce the risks and the damages caused previously. There is such an option like separating the entire operation of the both companies.
While the team is trying to de-risk GE Capital, they continue getting very nasty surprises. Meanwhile, investors are becoming increasingly cautious about the company deals, and the shares of GE Capital dropper for almost 50% only during the previous year. GE has already announced that it is going to put 2 billion USD in cash into GE Capital, but experts warn, that this sum might be too low to get the situation fixed.
That’s why, the top managers of GE believe, that it will be difficult to handle the issues of GE Capital, and it is more reasonable to concentrate on the profitability of the entire company. Investors judge about the company prospects from the value of the shares, and the shares of GE has dropped. So, the questions will be there till the company starts reporting about profit. And this can be done only in the case if the company starts concentrating on ways to get that profit.
Even though there are plans to shrink GE Capital, the department still stays with about 146 bln in assets. Those are a large airplane leasing business, a subprime mortgage operation, more than 3 bln can be generated from the collection of Polish residential mortgages.
However, even though the value of the assets is huge, there are so many uncertainties and liabilities, that to shed the business, GE will have to pay someone. Moreover, the sums to be paid are still unknown.
For now, Mr. Flannery assures, that there should be no more surprises, and now, the working group is checking the payment options to eliminate those liabilities that might appear, just to eliminate the further risks.
Mr. Flannery as well expressed his attitude to the insurance deal. He believes that it is not necessary, if everything is properly capitalized, and that the resolution is rather negative, as it requires a big transfer on a neutral item.
GE Capital was established in the last century and its main target was to help customers to pay for appliances. Jack Welsh, a former Chief Executive, made it gr. during the time when he was taking the position, the sum of the assets grew to 661 bln USD. Later, the financial crisis of 2008 followed.
Now, GE is planning to sell assets in energy and industrial finance for the sum of about 25 bln. However, to shed GE Capital, the company will, most likely, have to deal with the Justice Department, as some of the lending procedures of GE Capital were illegal and caused the financial crisis. After the businesses separation, the industrial division of the company will have to add a financial-services function. That is a tool that is needed to close the sales of their airplanes, that could cost not one hundred of millions of dollars. All competitors have the financial departments, that perform the sales functions.
The financial department is also important in the means, that when a client makes a deal, he, as well as the company, doesn’t have to get involved with the third parties. For the company, it is a profit. For the client, even though he doesn’t necessarily gets a more profitable deal conditions, but this creates an impression that he still gets a good deal.
One more piece of GE Capital business that is important to the company are the insurance obligations and the business in airplane leasing. Mr.Flannery has already made clear that he will look for all possible options to neutralize the obligations deal. The airplane leasing business is much simpler to handle. The executives used to tell, that GE Capital Aviation Services is a “jewel”, and, like any jewel, it is very easy to sell.
The business for now owns more than 2,000 airplanes and leases them to cargo companies, airlines, as well, this business is known on Wall Street as a business that knows how to manage the life of an airplane. The assets of the business amount up to 41 bln, and it gave more than 9.1 bln USD of revenue only during the last year.
Mr. Flannery has already made clear that there are no special items or departments, and a clear example of his intentions can be seen from his actions with the health care business that he used to run. He shed the business. Yeah, there are no “sacred cows” in any business, according to his own words.
For now, the airplane leasing business is still of significant value, and those 3 bln that the company is going to inject into GE Capital, should help the business to recover till the normal level of its operation.