GE Says Finance Unit Won't Need Capital Injection

While Loan Losses Mount With Higher Unemployment, Worst-Case Scenario Would Be a Break-Even Result By PAUL GLADER General Electric Co. reduced by half the projected profit for this year from its big finance arm because of growing losses in its consumer, commercial and real-estate businesses. But GE said Thursday the unit, GE Capital, would be profitable in the first quarter and should break even for the year, without requiring additional capital, under even a worst-case scenario for the U.S. economy. "We don't see a need where we would have to raise external capital," Chief Financial Officer Keith Sherin said. His comments came as part of five-hour briefing in New York where GE sought to quell investor fears about GE Capital, which helped drive GE stock to 18-year lows earlier this month. GE last month cut its dividend for the second half of the year, and Standard & Poor's last week stripped the company of its Triple-A debt rating. An early rally in GE shares lost some steam as executives disclosed more detail on the projected losses. GE shares were up 2.9% at $10.62 in afternoon trade on the New York Stock Exchange, after reaching as high as $11.35. In December, the company predicted that GE Capital would generate roughly $5 billion in profit this year. At the time, GE said it expected the unemployment rate in the U.S. to average 7.7% this year. The rate hit 8.1% in February and most economists expect it to go higher. Job losses in the U.S. "came on us faster than we realized," Jim Colica, a vice president of global risk management at GE Capital, said at the investor conference. Mr. Colica said the rising unemployment would lead to higher-than-projected losses in GE's consumer-credit businesses this year and put "more pressure, more stress on rents and occupancies" in its commercial real-estate business. The company now expects GE Capital will generate between $2 billion and $2.5 billion in net income in 2009 if unemployment averages 8.4% this year and the U.S. economy shrinks by 2%, as the Federal Reserve projects. In a more extreme recession, where unemployment averages 8.9% for the year and the economy shrinks 3.3%, GE said the finance unit would break even. "Even under this more severe case, which would potentially cause our losses and impairments to increase significantly, GE Capital Finance would still essentially break even and not require additional capital," said Mike Neal, chief executive of GE Capital. "We really think the biz is well-positioned to continue to perform and outperform the competition." Mike Neal Mr. Neal and other executives offered significant new details of the impact of the recession and credit crisis on GE Capital, which has roughly $600 billion in assets. Leaders at nearly every unit of GE Capital – from restaurant-franchise financing to aircraft leasing to home mortgages in Europe – said larger losses are likely. In commercial real estate, for example, GE said it expects bigger losses both in properties it owns and those where it has lent money to others. GE said it expects to recognize a $2.6 billion pre-tax loss on its $33 billion in property holdings, which it projects to decline in value this year by $6 billion. That compares to its December projections of a $400 million loss and a $4 billion decline in value. Among its loans, GE said it now expects losses of $900 million to $1 billion on its roughly $40 billion portfolio, up from earlier projections of $400 million in losses. Ronald R. Pressman, chief executive of GE Real Estate, said vacancies and delinquencies are rising, while financing for real estate deals has largely evaporated. "We expect values will be under downward pressure," he said. GE also increased its estimate of potential losses in its core $230 billion commercial lending and leasing businesses to $2.6 billion, from $1.5 billion. The company noted difficulties in transportation leasing, aircraft leasing, equipment leasing and franchise financing. GE said it had completed 93% of its expected debt funding for 2009, having raised $42 billion of its $45 billion goal. Most of that debt is backed by the U.S. government. GE Treasurer Kathy Cassidy said the company is considering using the guarantee program to issue additional debt this year to replace debt that is maturing next year. The government Tuesday extended its debt-guarantee program to October from June for debt maturing as late as December 2012. The company said it has disposed of $23 billion of assets in recent months, as it shrinks the finance unit. Ms. Cassidy said GE expects to reduce its total debt load by $30 billion this year and $35 billion next year. In particular, GE is reducing its reliance on short-term debt known as commercial paper to $50 billion, from more than $90 billion last year. GE said it has been shrinking its $60 billion mortgage business globally. It expects to originate $1 billion in new mortgages this year, down from $13.8 billion in 2008 and $25.4 billion in 2007. Delinquencies in places like the United Kingdom are rising and GE is focusing on collecting money and stemming losses. GE exited the U.S. mortgage business in 2007. At the same time, GE is working to increase funding through deposits globally. The company said it has increased international deposits by $6 billion in recent months. Write to Paul Glader at paul.glader@wsj.com