As banks pull back in credit crunch, GE steps up

BOSTON/NEW YORK (Reuters) - GE's commercial finance operations stand to benefit from the credit crunch, with private equity firms looking to rely more on General Electric Co (GE.N) for funding as banks pull back on lending.

Investment banks are stuck with more than $300 billion of leveraged buyout debt, which has severely limited their ability to lend money to private equity buyers.

It's a tough situation for Wall Street, but presents an opportunity for GE.

The commercial finance arms of GE lend large sums of money but are comfortable keeping the loans on their balance sheets. The world's second-largest company by market capitalization behind Exxon Mobil Corp (XOM.N), GE had more than $730 billion in assets at the end of the second quarter.

While GE does syndicate loans, in some instances it holds them alongside its many other assets.

That's a difference from investment banks, which for several reasons seek to quickly syndicate the loans, hoping to free up their balance sheets for more lending.

With Wall Street stuck in a logjam of debt, GE lenders can focus on pulling in more business.

"We've executed on a couple of deals in the last couple of weeks where other institutions have not fulfilled commitments that they've made and we've been able to step in and do that," Alex Urquhart, president and chief executive of GE Energy Financial Services, told investors this week.

"There might be an opportunity in the near term when some institutions falter on deals we want to do," Urquhart said. "This space is where much of the capital might go to."

GE officials said the company has experienced similar conditions at its financing operations.

While GE is best known for jet engines, gas turbines and other heavy equipment, last year about half its profit came from financial operations.

Private equity firms buy companies by borrowing most of the money, and sell them later for a premium. Frothy debt markets pushed leveraged buyout activity to its highest level ever this year, with more than $700 billion of deals through mid-August.

PLAYING INTO GE'S PLAYBOOK

The credit crunch has not only forced LBO firms to look for lenders beyond Wall Street, it has made big firms focus on smaller deals -- both factors playing right into the playbook of GE's financial units.

"They're not really regulated like a bank, so they can write a big check -- $300 million to $500 million -- and not feel the need to syndicate the loan," said a private equity executive who did not want to be named. "So this is a good time for GE to step it up."

JP Morgan analyst Stephen Tusa wrote in a note to clients this month: "While interest costs will likely go up for GECS (GE Capital Solutions), the company has ample access to funding, at an attractive rate."

The action at GE's financial units underlines an argument often made by advocates of GE stock -- that its diversification allows it to continue to grow even in rough financial times.

"This probably pays to their benefit, just because they're so diversified, they're going to have some opportunities that maybe the banks will have to turn away from," said Mike McGarr, portfolio manager at Becker Capital Management, a Portland, Oregon-based company with about $2.5 billion under management.

Reflecting that, GE shares -- which in recent years lagged major U.S. indexes -- are up 8.9 percent in 2007, outpacing the 7.7 percent rise of the blue-chip Dow Jones industrial average .DJI and almost double the 4.6 percent gain of the broad Standard & Poor's 500 index .SPX.

The shares in July passed the $40 mark for the first time since 2002, but fell in August as portfolio managers sold GE positions in the face of rising redemptions amid market turmoil. They have since crossed back over $40, and on Thursday rose 1.5 percent to $40.51 on the New York Stock Exchange.