There's a silver lining for GE Capital in the wake of its parent General Electric Co.'s (NYSE:GE) rating downgrade to AA+ from AAA by Standard & Poor's Thursday morning: Credit default swap issuers have reduced the size of the up-front payments they want to insure against default by the financing unit of the Stamford, Conn.-based conglomerate.
According to Reuters:
"Five-year credit default swaps on General Electric Capital traded around 8% upfront, versus 9% upfront before the downgrade, in addition to 500 basis points annually, according to Phoenix Partners Group. That means it costs $800,000 in an upfront payment, plus $500,000 a year, to insure $10 million of GE Capital debt for five years."
Concerns about GE Capital were eased when S&P gave the debt a stable outlook, indicting that it's unlikely to downgrade the rating any further in the long term -- of course it took S&P 53 years to rescind its AAA rating on GE.
The cost of swaps protecting against a GE Capital default have been improving over the past week. Although spreads are still in the same range as a distressed company spreads have tightened to roughly 500 basis points from 710 basis points on March 3. But issuers of credit default swaps on GE Capital's debt are also taking no chances. Up-front payments on contracts is a step not usually taken until a company is in dire straits and unheard of for the previously platinum-plated GE. - George White
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See Dealscape post on GE Capital swaps
See Dealscape post on GE's ratings downgrade
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