TMFDeej (99.47)

Barron's is pumping the heck out of GE Capital bonds, but I'm not buying it

March 16, 2009 – Comments (2) | RELATED TICKERS: GE

Bonds are practically ignored by the mainstream financial media.  The fact that there seems to be such a dearth of information on bonds is one of the reasons that I am fascinated with them and have taken it upon myself to write more about them.  Whenever I come across an article on bonds in Barrons, Fortune, Kipplingers, etc...I always read it right away.

This week's Barrons' touts GE Capital bonds as being a good buy in two separate articles, but I'm just not buying it.  At this point, I need to take time out to give kudos to DemonDoug who correctly warned me against buying GE common stock last year.  Thankfully I sold my stake in the company several months ago when I first got a feeling that it might cut its dividend, but before the mainstream media picked up on that the fact that it might.  That saved me some pain...and pushed me even more into the camp of bonds.

Anyhow, the Barron's pieces quote several analysts who believe that GE Capital's bonds are a great buy right now.  Here are some examples of them that were mentioned:

GE Capital 5.625% 2018: Yield to Maturity (YTM) 7.59%

GE Capital 6.45% 2046: 8.82% YTM

GE Capital 6.05% 2047: 9.14% YTM

For the life of me, I can't understand why these are a good deal right now.  GE Capital is a messed up black box with exposure to all of the wrong things, mortgages, credit cards, commercial real estate...  The ratings agencies are a bunch of fools and even S&P recently stated that if GE Capital was a stand-alone company right now, its debt would be rated just single-A...four notches lower than its recently slashed rating.

General Electric only explicitly guarantees $800 million of GE Capital's $510 billion in debt.  That means that GE Cap is completely dependent upon the kindness of its parent company and the U.S. government if it runs into trouble.  So let me get this straight, these analysts expect me to buy the bonds of a company that for some reason has a credit rating that's probably much higher than it should which yield only 7.5% when I could buy the bonds of a hundred other companies that are in better financial shape, have better assets, and have much higher yields to maturity.  No thanks.

The yields for GE Cap's longer-term bonds are slightly better, but there's no way in heck that I am not going to commit my money to any bond that isn't scheduled to mature for nearly 30 years that doesn't have a double digit yield.  Who knows how high interest rates are going to eventually head.  I expect them to stay low for the next several years, but not forever.

Every single analyst who talks about GE's common stock, starts off with the statement "assume that GE Capital is worth nothing, GE is still trading for less than the sum of its remaining parts."  So you want me to buy the bonds of a entity that everyone assumes is worthless?  I have actually purchased small stakes in bonds and preferred stock in worthless companies that are practically insolvent, such as Bank of America, AIG, CIT Group, Textron, but people are paying through the nose to get me to take this trash off of their hands. 

The yields on GE Cap bonds are not in line with the risk that one has to assume to hold them.  I'm not saying that GE Capital is doomed.  It could very well end up being fine, but to me it doesn't seem like investors are being adequately compensated for the risk that is associated in investing in its bonds.

Deej