US CREDIT-GE, Caterpillar CDS spreads may presage problems

By Karen Brettell

NEW YORK, Sept 17 (Reuters) - Debt protection costs on the
finance arms of industrial companies including General Electric
Co (GE.N) have surged at a faster pace than the general market
in the past month, which may foretell problems for the
companies.

The financing arms of Textron Inc (TXT.N), Caterpillar
(CAT.N), Deere & Co (DE.N) and Boeing (BA.N) have all seen
their credit default swap levels jump by more than 200 percent
in the period, compared with a broader market selloff of around
30 percent, according to research by broker Tradition Asiel
Securities.

"The credit default swap market is highlighting structural
issues with these businesses," Gary Kelly, director of research
at Tradition, said in a report. "With the credit market
essentially closed, these financing arms are facing significant
issues in our view."

General Electric Capital's credit default swaps leaped 31
percent on Wednesday to a record 514 basis points, or $514,000
per year for five years to insure $10 million in debt,
according to Markit Intraday. It has widened from 146 basis
points a month ago.

Debt protection costs on Textron Finance Corp also jumped
24 percent on Wednesday to 277.5 basis points, Markit data
shows.

"Historically many of these businesses have financed sales
because of the availability of cheap capital," Kelly said.
"With the cost of debt escalating, the cost of providing any
sort of customer financing is prohibitively high."

Concerns about the health of financial companies have
mounted this week following the momentous events which saw
Lehman Brothers LEH.N file for bankruptcy, Merrill Lynch
MER.N agree to a takeover by Bank of America (BAC.N) and the
Federal Reserve agree on an $85 billion rescue package for
insurer AIG (AIG.N).

The uncertainty has sent debt protection costs on companies
soaring, even for those that have not had evident credit
problems.

Volatility in spreads this week has been influenced by
short sellers aggressively targeting firms, said John Atkins,
analyst at IDEAGlobal in New York.

"This is one of those transitions from a very defensible
fear into tarring everything with the same brush," he said.

Nonetheless as credit conditions tighten further, it can't
help but hurt companies that rely on providing client funding,
he said.

"Rightly or wrongly this series of events means everybody's
hunkered down and sidelined and not really providing material
credit for all the things that are growth areas for the names
involved," Atkins said.

As long as credit costs remain high, the businesses will
struggle to extend loans at economic rates, which will slow
down their sales, said Tradition's Kelly.

"Either you provide financing at a significant loss or you
see a sales decline due to an unwillingness to provide capital,
at a loss to your customers," Kelly said.

"Either way we think the implication for the corresponding
equities remains extremely negative: either sales decline or
financing costs escalate," he added. "Both materially and
negatively impact cashflow and equity valuation."
(Reporting by Karen Brettell; Editing by James Dalgleish)