GE sees surge in bankruptcy financing

By Scott Malone

NEW YORK (Reuters) - General Electric Co (GE.N) expects a five or sixfold rise this year in demand for financing to help bankrupt U.S. companies restructure themselves as the credit crunch leaves a growing number of businesses scrambling for liquidity.

U.S. 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 (LEHMQ.PK), prompted an $85 billion U.S. government rescue of American International Group Inc (AIG.N) 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.

SMELL OF RECESSION

"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 percent at the beginning of this year to about 3.3 percent 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.

'SELECTIVE' APPROACH

GE shares lost some 20 percent 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 U.S. 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."