GE sees surge in bankruptcy financing

US demand for debtor-in-possession loans, which help companies operating under bankruptcy-court protection, is on pace to hit $10 billion to $12 billion this year, up from about $2 billion in 2007, said Rob McMahon, managing director for restructuring at GE corporate lending.

“Bankruptcies, they fall out of the sky, as we've all seen in the last two or three weeks,” McMahon said at the Reuters Restructuring Summit in New York. “We had 40 filings last year. We had 80 year-to-date through the end of August, call that number 100, it's not hard to imagine that DIP volume should be at that $10 billion to $12 billion level.”

Overall, the current credit crunch - which brought on the bankruptcy of Lehman Brothers Holdings Inc, prompted an $85 billion US government rescue of American International Group Inc and caused once-proud Wall Street investment banks to rethink their need for Federal Reserve protection - makes for the worst economic times in two decades, said McMahon. His unit, part of the conglomerate's GE Capital arm, specializes in providing loans to struggling companies.

The credit crunch has some lenders pulling back from DIP lending, meaning that businesses that file for bankruptcy protection might have a harder time finding that financing.

“If a company is over-leveraged and has a broken business model in an industry that's in trouble ... that's going to be more problematic. There will be a great deal of reticence for bankers to consider lending to that company,” McMahon said.

“The 2001 recession didn't feel or smell anything like what we're going through right now,” McMahon said. “The 1990 one did, although I do wonder about the magnitude of comparing the 1990 recession ... it feels deeper and wider.”

He expects GE's DIP lending to grow at a faster rate than the industry average.

GE's restructuring lending unit expects to make about $2 billion to $3 billion in loans this year, up from $1.75 billion last year, he said. The default rate on its loans is running below the industry average, which has spiked from 0.24% at the beginning of this year to about 3.3% currently.

While GE is well known for making heavy equipment like electricity-generating turbines and jet engines, the Fairfield, Connecticut-based company makes about half its money from its finance arm.

GE shares lost some 20% of their value last week, notching a five-year low on Thursday, only to recover most of the loss by the end of trading on Friday. Investors attributed the drop, which came amid a heavy sell-off in US stocks, to concerns about GE's financial arms.

McMahon said his unit would be proceeding with caution in the face of surging demand for its services.

“When things get frothy and zany like they did two years ago, we're selective. If we need to sit on the sidelines and watch it happen, we will. We're not going to be rolling up an inordinate amount of debt, we're not going to do things that are counterintuitive to our culture,” he said. “We originate and we hold. So if we spend time with a company and we understand what you've been through, notwithstanding the fact that you might be in a tough industry, we will be OK with that.”

GE shares were off 3 cents at $26.59 in afternoon trading on the New York Stock Exchange, above last week's five-year low of $22.19. So far this year they are down about 28%, a deeper drop than the 16.5% fall of the broad Standard & Poor's 500 index. (Reuters)