GE Investors Get a Peek in Junk Room

By PETER EAVIS General Electric's finance arm holds a lot of junk. Literally. To meet investor demand for more details about GE Capital, managers held an investor day Thursday, during which they gave out much new, and welcome, information about the unit's $637 billion of assets. One detail: Large amounts of GE Capital's loans are to borrowers with junk, or sub-investment-grade, ratings. For instance, 81% of the $55 billion of equipment leases in the Americas is to borrowers below investment grade, and 40% are rated B+ or lower. On the $38 billion leveraged loan book, 76% of the borrowers are rated below B+, and 28% are below B-. Granted, these types of lending have traditionally been to companies with less-then-stellar ratings, so GE has experience in handling them. And if a borrower defaults, GE can seize hard assets that will offset losses. Even so, recessions hit junk-rated borrowers hard -- and hurt even the most seasoned lenders. GE Capital holds reserves against defaults, but they may need to be higher. For instance, management is expecting $333 million of credit losses on its leveraged loans in 2009 -- less than 1% of the total amount. The unit aims to have reserves at 1.2% of the book this year. GE Capital's consumer portfolio also contains a lot of loans to lower-grade borrowers. The company said 58% of its $183 billion in consumer loans were to prime borrowers, implying a sizable 42% were to non-prime borrowers. The big question about GE is whether it will have to raise more capital to absorb losses at GE Capital. The latest disclosures suggest that it will. Write to Peter Eavis at peter.eavis@wsj.com