GE Peddles LBO Loans in Europe as Profit From Light Bulbs Dims

General Electric Co.'s dwindling profit from light bulbs and dishwashers is driving the world's largest industrial company further into finance and the lucrative European market for leveraged loans.
GE's commercial-finance unit already is big enough to be the seventh-largest U.S. bank. That helps explain the lure of European takeovers, where demand for leveraged finance is increasing seven times faster than in the U.S and creating a bonanza for lenders.
Chief Executive Officer Jeffrey Immelt, who has failed to match the earnings growth GE achieved under predecessor Jack Welch, has a growing incentive to win more of the $17 billion that debt-laden companies pay annually in loan fees. While GE rose to 11th in U.S. leveraged loans from 20th in 2000, established lenders such as Royal Bank of Scotland and Barclays Plc dominate the European market.
``Barclays and RBS are big enough to cope even with the scale and character of GE,'' said Richard Dunbar, a fund manager at Scottish Widows Investment Partnership, which oversees $140 billion including shares in both banks. ``New competition is never helpful, but there's enough business to go around.''
Fees of 2.5 percent, or $25 million for a $1 billion leveraged loan, have helped make commercial finance more than twice as profitable for Fairfield, Connecticut-based GE as industrial products, company reports and data compiled by Bloomberg show.
Fueled by LBOs
The loans are typically used in buyouts, where an acquirer piles debt onto the company it's purchasing. Unlike junk bonds, which also are rated below investment grade, the loans are secured on a company's assets, making repayment a safer bet in case of bankruptcy.
European leveraged loans more than doubled to $175 billion last year, stoked by an increase in borrowings for buyouts such as the $15.3 billion purchase of TDC A/S, Denmark's former state- owned telephone company, according to Bloomberg data. That compares with 15 percent growth in the U.S. to $529 billion.
GE has 60 bankers in Europe dedicated to leveraged loans, up from 10 two years ago. They were among the 600 managers whom GE Commercial Finance CEO Michael Neal, 52, convened at the Fairmont Monte Carlo this month to discuss strategies for making GE's banking business in Europe as big as it is in the U.S.
``Our goal is to become one of the top 10 arrangers of leveraged transactions in Europe,'' Sandeep Kamat, 43, GE's London-based head of European leveraged finance, said in a Feb. 3 telephone interview while attending the meeting in Monaco.
47th Place
That would have meant about $10 billion in loans in Europe last year -- and $250 million in fees at the industry average. Instead, GE ranked 47th with $51.1 million, Bloomberg data show. GE has been 10th or 11th in U.S. leveraged loans for the past four years.
GE in December beat BNP Paribas SA, Europe's No. 4 underwriter, to help arrange a $342 million loan for Poland's first leveraged buyout. Matthew Strassberg, a director at Mid- Europa Partners in London, which borrowed money to acquire Aster City Cable from Hicks Muse, said GE won in part because it was faster and more persistent.
``We could get answers from GE on the telephone right away instead of waiting days, and they were very quick to go through the loan documents,'' Strassberg said. ``They've actively been approaching us over the last year or so with the clear intention of getting involved in any new deals we might do. GE wants to be part of the structuring, the underwriting, and to take bigger upfront fees.''
Immelt's Struggle
Royal Bank of Scotland, based in Edinburgh, was the No. 1 arranger of European leveraged loans in 2005, with $26 billion in credits, followed by London-based Barclays, New York's Morgan Stanley and Paris-based BNP Paribas, according to data compiled by Bloomberg.
Arranging loans for leveraged buyouts, or LBOs, helped lift pretax earnings at Royal Bank of Scotland's corporate markets unit by 23 percent to a record 2.5 billion pounds ($4.3 billion) in the first half of 2005. Although the unit accounts for only a third of the bank's revenue, it generates two-thirds of pretax profit, company reports show.
Immelt is raising GE's bet on finance as he struggles to meet a goal of increasing earnings at an annual rate of at least 10 percent. Welch accomplished that feat during the last five years of his two-decade tenure.
``This looks like what Jack Welch was doing when he became CEO in the early 1980s,'' said William Batcheller, director of investment management at Youngstown, Ohio-based Butler Wick & Co., which owns about 691,000 GE shares. ``The difference is that Immelt has come in during a tough period.''
Since Immelt took over in 2001, GE's net income has risen an average of about 5 percent a year.
Light Bulbs, Loans
Financing, including credit cards and home loans, generated $59.3 billion for GE last year, or about 40 percent of its revenue from continuing operations, according to a U.S. Securities and Exchange Commission filing.
GE Commercial Finance has an operating margin of about 16.8 percent, compared with 7.8 percent at the industrial unit that includes light bulbs, appliances, motors and plastics, estimates Don MacDougall, an analyst at Bank of America Corp.
While GE has been making light bulbs since its founding in 1892, with inventor Thomas Edison as an original director, earnings from lighting haven't been disclosed for three years. GE reported $44 million in profit for 2002 on $2.4 billion in sales, according to its annual report.
``GE claims the light bulb unit breaks even,'' said Steve Hoedt, a Cleveland-based analyst at National City Corp., which owns more than 22 million GE shares. ``I guess they keep it for brand recognition.''
Cash Cows
GE has been making loans to companies since 1905. It bought Chicago-based Heller Financial Inc., whose customers included Amazon.com Inc. and Hilton Hotels Corp., for $5.3 billion in 2001 to bolster the financing unit, and last year acquired Antares Capital, a lender to mid-sized buyout firms.
While lighting and appliances may be among GE's least- profitable divisions, they generate $4 billion in cash annually to help fund faster-growing LBO lending.
``Make no mistakes,'' Immelt, 49, told analysts on Dec. 13. ``We run this set of businesses for cash and they generate a ton of cash.''
GE, the world's second-largest company by market value after Exxon Mobil Corp., started making high-yield, high-risk corporate loans in the U.S. in 1993 and now has about $50 billion outstanding. It entered the European market for leveraged finance in 2004 and since has loaned $7 billion to about 100 companies.
`Money is Cheap'
Most banks are focused on winning fees from buyout firms, which last year raised a record $134 billion for takeovers, according to Private Equity Intelligence Ltd., an industry research firm in London. That influx of cash is helping fuel the biggest LBOs since Kohlberg Kravis Roberts & Co.'s record $31 billion purchase of RJR Nabisco Inc. in 1989.
Buyout firms typically fund two thirds of each acquisition with loans. That's been getting easier as competition to arrange leveraged loans increased, reducing borrowing costs.
Lenders charged a record low average of 1.6 percentage points above benchmark interest rates in October for loans to the average U.S. company rated BB, two levels below investment grade. The so-called spread was 1.97 points in January, down from more than 3 points two years ago.
In Europe, the average spread narrowed to an all-time low 2.34 percentage points last month.
``Money is cheap and there's lots of it,'' said John Cameron, 51, head of Royal Bank of Scotland's corporate markets division in London.
Standing Room Only
In a syndicated loan, the arranging bank underwrites the credit and collects the fee. It then parcels out about half of the fee to other lenders that agree to participate. Mostly, those lenders are banks. Increasingly, money managers are buying high- yield loans.
Fund managers such as Boston-based Eaton Vance Corp. bought about 40 percent of all European leveraged loans last year, up from 25 percent in 2004 and 4 percent in 1999, according to Standard & Poor's. In the U.S., they buy about 80 percent.
Eaton Vance's John Redding was one of 250 bankers and investors who crammed into the ballroom of London's Four Seasons Hotel on Jan. 11 as Ineos Group Holdings Plc executives explained a plan to borrow 9.8 billion pounds in high-yield bonds and leveraged loans. Ineos, based in Hampshire, England, needed the money to buy BP Plc's Chicago-based Innovene unit and become the world's No. 4 petrochemical company.