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During the second half, attendees were treated to brown bag lunches and a look at UK mortgages, Eastern Europe, and securities held for investment. The stock fell steadily amid a larger market rout, though investor sentiment had kept it buoyant in the morning. During the Q&A the stock went into negative territory, and ended the day down about 1.8%.

12:15

As things start up with UK mortgages and consumer finance, I’ll share some feedback:
Reading through the GE Presentation. A former employee writes that he’s not whether all the emphasis on “lease-to-hold” is a product of strategy or necessity due to the fact that after Oct 2008 the third party debt markets dried up. If you’re enterprising, maybe it’s time to start looking at whether GECC’s capital markets team syndicated its equipment portfolio to third party investors. If anyone out there has thoughts on this, let me know!

Looking at US consumer finance, the company says that in 2007, when it saw the US consumer weaken, it tightened up exposures to the market.
If you go to your Bloomberg terminal and pull up some of the master trust documents inked on credit card backed securities issued by GECC, you can dig deeper on this issue. They may have seen problems, but cards were still being issued in 2007 to customers at stores like Wal-Mart, the Gap, and Sam’s Club in locations like Florida and California. Sanford Bernstein analyst Steve Winoker, in an earlier research note, had asked for details here. Am interested to see this deep dive into where accounts are and with which retailers. They also did white label credit cards for JC Penney and Mervyn’s, along with dozens of other big retailers.

This is their case for why white label credit cards are a better business than bank cards, as well as underwriting actions taken when they saw the market deteriorate.

They have taken actions to account for higher unemployment, though it seems up 9% (here’s a delinquency-to-unemployment correlation table) and are driving yields to offset losses.

The piece of the portfolio under stress, the say, could be a problem because once a consumer gets into trouble in this environment it’s so hard for them to come out. They’ve added 1,000 collectors. And then they put up their anticipated stress case for consumers, global, rather than US only. Analysts have said that they are concerned specifically about the US consumer, so let’s hope we get a more granular slide. There is a slide for the sales finance stress case. I had to take a call, so if you have the US consumer slide or a comment, please let me know.

12:40

Mortgages. UK is the worry and they say in the UK they have solid underwriting and aggressive collections all over the world.

While some seem pleased by the “how we do it” tone of the presentation, some seem not impressed by the emphasis on management skill (we have great standards) and would like to see stress case scenarios that look at what happens if unemployment goes above the 10% mark.

12:45
Stock update. GE shares have given back about half of their earlier gains, but are still up more than 3%.

They’re shrinking the mortgage business everywhere and as of 2008 the mortgage portfolio composition shows that UK mortgages made up 51% of the total.

Here’s the UK mortgage detail. About 23% of the UK home lending book is a second mortgage. Once again, emphasize originate to hold. They also say the UK mortgage market and consumer was significantly different from the US. Any UK pros out there care to comment? Here is their UK economic environment forecast or 2009 and the way GECC has layered risk and losses.

12:56
With about an hour left in the meeting, it’s almost q&a time; and while a lot of data has been presented we’ll see what the audience thinks has been left out.

An interesting aside from a listener… the mortgage team is very proud of the fact that it has mortgage insurance on a lot of the portfolio. AIG, their main insurance provider, is in trouble.

Here is their UK mortgage stress scenario.

1:06

They’re talking Eastern Europe, thanks largely to questions first raised by Peter Eavis over at the Wall Street Journal about the durability of the portfolio.

They do think they’ll see slower growth in the area. They reduced origination in 2008 and increased collections. (Increasing collection capacity is a theme running through the presentation).

They are saying that this is still an attractive business despite near term volatility. They’re working with the No. 5 bank in Poland, the No. 4 bank in the Czech Republic, and the No. 8 bank in Hungary. Let us hope that these top tier banks in Poland, the Czech Republic, and Hungary had better underwriting standards and risk controls than, say, US counterparts like Wachovia and Citigroup.

1:18

The stock is now down on the day by about 1%. GE was strong in the morning up 6%, gave back half its gains around noon, and then continued to fall during the UK mortgage and Eastern European bank portion of the presentation. BUT, it’s important to mention that the markets were being dragged down by financial stocks in the morning and that GE may have succumbed to the trend. The stock could pop back into positive territory.

1:29 GE’s been in Eastern Europe for 15 years, which is good. Since 1994, when the company entered the area, there was tons of turmoil and backtracking as different countries opened to capitalism and stabilized. But as for how they’ll handle a severe, never-before-seen downturn, that is still an open question. GE has a stress test for this area. But I wonder, was there an adequate stress test, say, in the beginning of 2007, for what was to happen to US homeowners and banks?

1:38

Just noticed there are comments to this blog… will start getting them up as the company goes through their summary.

1:42
See $2 billion to $2.5 billion in earnings for GECC. S&P sees little to none in earnings.

The company sees a worse case scenario of $18.4 billion in impairments and credit costs for GECC.

1:45

Overall, executives are striking a pretty positive tone and the stock is up again. Heading into the Q&A I’m getting a little bit of feedback.

One analyst thought that the earnings stress cases met expectations, and that expectations were for them to be pretty bad. But the equity downside might have been more limited than expected, which is good for sentiment.

Of course, there are always a some bears about. Another listener says he thinks GECC still needs to be more aggressive about assumptions re: unemployment and GDP, as well as consumer credit card defaults. And Eavis that WSJ still thinks the big question is whether they’ll need to raise more capital.

2:03

GECC took the average of the top 3 banks and compared coverage ratios. GECC has 6.3% of reserve coverage against its US credit card portfolio v. 7.8% for the banks. GECC has 5.46% reserve for sales financing v. 3.1% for the banks.

2:06

For the investment securities book (i.e. bonds that the company holds), about half the book is in corporate debt. Most of their subprime mortgage backed bonds are wrapped by monoline insurers including FSA, MBIA, Ambac, and FGIC.

They also provided a list of all the foreign banks in which the company has a stake.

2:19

Mike is wrapping it up “five hours, 20 minutes, one fire alarm, and 160 pages later.” The good thing is that this move to be more transparent has worked for GE and soothed nerves. It seems like the problem for the stock wasn’t necessarily weakness in the book, but a lack of transparency and company assurances that everything would be fine, that they wouldn’t lose the AAA, and that they wouldn’t have to cut the dividend to save cash.

The company today came out with loss projections and lowered its earnings estimate by quite a bit, and the stock is still up 1%. Maybe investors just needed to know they weren’t dealing with a black box?

2:29

Here is their view on Q1.

I’m hearing that bond desks are still feeling cautious about the company’s default assumptions and full year outlook, but not acting. The next big catalyst will be when we finally see earnings strength or weakness.

It’s late. Here are a couple of highlights from the Q&A:

On GECC earnings:
GECC said it should generate between $2 billion and $2.5 billion in net income in 2009 if unemployment averages 8.4% this year and the U.S. economy shrinks by 2% (check out the full WSJ story here). But in a more extreme recession, where unemployment averages 8.9% for the year and the economy shrinks 3.3%, GE said the finance unit would break even. Someone in the audience mentions that most of the $2 billion to $2.5 billion in earnings comes from a tax benefit, rather than actual earnings. He wants to know whether the company has taken all the costs out in these calculations or if there is a new target.

Management says cost take outs are ongoing.

Interesting. As pointed out by this question and others, management has left room for the possibility that GECC will, as predicted by S&P, earn nothing in the quarter.

Also, a Barclay’s analyst asked about the tax assumptions. People don’t seem comfortable with so much of earnings riding on a tax benefit.

Someone asks if the company has a benchmark for impairments and losses this time around compared with during other recessions.

GECC says it’s tough to compare this book and this market to get a benchmark.

Someone wants to know how the company can run a match funded book if it is borrowing so much in advance.

GECC says this is not a change in match funding, but it is inefficient from a return-on-investment standpoint. But from a liquidity perspective, it’s worth it.

Scott David at Morgan Stanley wants to know about GECC’s cost of capital.

According to management, it’s little changed from December 2, 2008, when they had the first GECC meeting. It’s at about 4.6%.

In response to a layoff question, GECC says they can’t give a headcount expectation for 2009. But the company does disclose that it laid off between 20,000 and 25,000 people worldwide last year.

The Goldman analyst wants to know about the leveraged loan book, which he says the company is carrying in the 90s whereas the market is pricing similar securities near the 70s.

GECC says it regularly goes in to value the portfolio, but doesn’t take write offs unless there is impairment.

Near the end, someone wants to know why the company didn’t just suspend the dividend altogether. Sure, you might end up overcapitalized, but in a world where he sees unemployment going to 10% (above GE’s assumption for their stress tests) he thinks this would be fine. Plus, he adds, the company is heavily reliant on government backing to roll and issue debt, and those programs could end. That’s a lot of uncertainty.

GECC said they didn’t cut because after looking at their capital position and the additional ways they can wring cash out of the company, they decided they didn’t need to slash the dividend altogether.

The first half of the presentation, led by chief financial officer Keith Sherin, was received well by investors who drove the stock up as much as 6%…

8:00am

People are already lining up at 30 Rock security for the GE Capital (GECC) discussion and the buzz is palpable. Thanks to the Wall Street meltdown, an investor presentation on loan loss provisions is now an electrifying event.

8:30am

A couple of pre-game thoughts from investors and analysts…

* This is going to play heavily to the fixed income guys rather than the equities people. Severe and sharp movements in yields and credit default swap spreads on GE bonds have driven stock performance. The stock can’t go higher until the credit markets believe in GE.

* We’ll hear a firehose of numbers, but there is a difference between data and meaningful data. We’re looking for real loan loss stress cases, and the market will be very disappointed if they get either weak stress cases or any signs of “just trust us, we know what we’re doing,” rather detailed explanations.

* For a long time the company didn’t want to talk about GECC or denied there were any problems. When the stock went down and GE was finally forced to open up about GECC, it only drove the price down more because we could see that there were potential issues. If they are truly transparent today, this could solve the spiral of worry, denial, stock price decline, management disclosure. This is the best case scenario.

* The major questions are whether they will be taking charge-offs on receivables, loans, and goodwill. We would like to hear about any capital raising plans. We will be listening for possible shifts in strategic direction such as reducing reliance on GECC.

* GE’s job is to manage expectations incrementally and minimize the rate of change in perceptions (to the downside) until the credit crunch and recession lift and we can actually know how to value this company. It could be several quarters before we really know where we stand with GECC.

9:00am

Introductions: Keith Sherin, CFO, Mike Neal, GE Capital CEO, and 15 members of the GE Capital leadership team.

There will be an hour at the end for questions, none throughout the presentation. Eyebrows shoot up…

Turns to Sherin.

9:02

Sherin: Reiterates that the “hot spots” will be covered and that the company has a strong liquidity position, completed 93% of debt funding through the year. There is enough capital to weather a lot of adverse cases, and even under these stress cases GECC will be profitable. There will be no need to raise external capital.

Says there is 6-1 leverage in GECC using the capital they raised last year. They raised cash balances. They have $60 billion in capacity with the government.

Ratings update: We’ve been working closely with the ratings agencies. Considers the AA+ with stable outlook from S&P a terrific outcome because the financial biz is clearly under stress.

Final word on GE’s commitment to GECC: GE must commit money to GECC if the finance arm doesn’t hit a target ratio. They have consistently put money into GECC to keep it adequately capitalized.

9:10

Mike Neal says GE is going to grind you through 174 pages of things you probably haven’t seen before.

Also reiterates that they’re here to be informative, rather than predictive.

Shows a chart from the Dec. 2 meeting reiterating that GE still has a cost advantage over other financial firms. As well as the GECC portfolio breakdown that most of the crowd has seen before.

Emphasizes that they avoid all of the most toxic securities/acronyms that have wreaked havoc on the market: CDS, CDOs or SIVs. No mezzanine or high yield bonds.

This is all important information, but for most investors they’ve seen it before – the breakdown of GECC’s segments and why they are great… why GECC is much more conservative than the typical bank. While this may be true, no one is saying GECC is the next Lehman. They just want to know if GECC is going to be an ongoing source of surprise earnings misses.

As one investor said: Nothing new so far, just the same: “All is well at GE, just trust us.”

9:20

They threw up a slide with the summary of their stress testing. Interestingly, it looks like in their worst case scenario (which utilizes Fed guidance…) U.S. unemployment will peak at 10.1% and GDP will decline by 3.3% for 2009. Unemployment last month hit a 25-year high of 8.1 percent and Michigan, which has the worst unemployment in the country, is already at 11.6%.

9:26

Kathy Cassidy, GE Treasurer, gives detail about the company debt and cash flow, as well as sources of alt funding. they won’t be going back to the market without government backing until the markets stabilize. The company is following the progress of other government programs with an eye toward how they can help the debt markets generally. The company continues to emphasize that they participated in government debt programs NOT because they had to, but because the government wanted them to… and because GE wanted to support those programs to support the debt markets generally.

She’s reiterating statements on capital ratios, liquidity, and debt that are a continuation of her Dec 2 remarks.

She says GE could use some of its $60 billion leftover from its TLGP line to pre-fund debt that will come due in 2010.

9:38

GE Capital chief risk officer Jim Colica again reiterates that we’re going to get a lot of detail today, though no new detail has come.

Getting back to the comments made by Mike Neal, he said GECC does not underwrite any credit default swaps. Since so many finance companies at least hedged their books with CDS, it is surprising that GECC avoided doing so. They didn’t underwrite, but did they buy CDS against bond defaults? Remember, doing so was considered a savvy and risk averse strategy before CDS became suspect. Would be an interesting question for the Q&A that will happen at the end of the session.

9:44

Colica’s been showing slides that show that the portfolio is diverse and that this should allow it to hold up under economic duress. But, as one analyst says, the stress test is presented as a conceptual process, not a rigorous scenario analysis of what would happen under truly adverse economic possible outcomes.

But it is good that in its stress testing, GE has not factored in the potential positive benefits from the stimulus program. This provides room for positive surprises in the book.

9:53

The commercial real estate team is up. This is the moment many have been waiting for. This is where we should get some detail. They key drivers in the stress case will be GDP (-3.3%), unemployment (peak 10.1%), and liquidity. It’s a $368 billion portfolio. The debt portfolio is $48 billion.

The division finances the purchases of real estate by third parties. They own and manage real estate, including office, apartment, warehouse, and retail buildings around the world. They provide financing to owner-occupied commercial real estate.

The head of the division (Ron Pressman?) says that in the sector “the pressure point will be centered on debt maturities in 2009 around the world,” adding that banks will be forced to extend or restructure loans, or even foreclose. All of this is putting pressure on values in the marketplace. He notes that value pressure varies around the world. In Tokyo and Paris GE sees 5.6% rental rate pressures; while in London and Madrid the company sees 20% plus. Values will be under downward pressure, which is why GE marked down the portfolio by 18% in the fourth quarter.

The $48 billion debt portfolio is primarily made up of senior secured first mortgage positions, which the company says is the strongest part of the capital structure.

They continue to emphasize their strong risk management.

10:21

Credit costs: The total debt portfolio has outperformed the industry overtime and they’ve historically had fewer charge-offs. The slide that shows this only goes back to 2005.

The company is emphasizing that reserves have been going up. It should be noted that critics have said GECC is still under-reserved, despite the increase. The company’s reserve model for this portfolio uses industry models.

10:25

Stress test for property valuation is up (3500 commercial tenants 8000 properties, 2600 cities). They look at the net operating income of all 8,000 properties (4800 underlie debt and 3200 underlie equity) to come up with recession cases for rents and occupancies. Here’s the slide for the stress case. Keep in mind, all stress tests use the Fed’s assumptions for GDP and unemployment.

10:34

Sorry for the break. Getting notes from GE asking us to reiterate that we’re listening to the presentation and watching the webcast with color coming at us from participants within the room. Point taken. Thanks! Other listeners, please feel free to comment or email me at kbenner@fortunemail.com

10:38

The company has noted that it bought 80% of its real-estate holdings with cash and has no mortgages. This is certainly a good thing. Matthew Kelley, a Sterne Agee bank analyst, wrote in a recent note that GE dove into the real estate market at the height of the boom. We’ll see after Q1 how GE accounts for the fall (if any) in values.

10:43

Here is a slide showing why GE’s unrealized loss is so small compared with real estate investment opportunity funds.

10:49

This slide breaks down their unrealized loss of $4 billion for 2008.
Even though alarm bells have interrupted the meeting, the stock is on a tear. Thanks to the morning performance, GE shares are up more than 6%.

12:58

They’re starting back up and are seating people after an impromptu break. Reuters’ take away from the top half of the presentation: in its stress case, General Electric expects $900 million in losses against loans at its GE Real Estate portfolio, representing an implied default rate of 8 percent. Assuming the Fed’s worst case for the economy, that number would rise to $1 billion, or an implied default rate of 10 percent. Its current default rate is 1.01%.

11:01

Meeting begins with joke that shortsellers called in the fire alarm and a couple of bomb threats. Funny? Um, sure…

Back to the loan losses summary…

It’s interesting to see the velocity of equity impairments.

11:10

Jumping back to the top of the session to Sherin’s remarks that GE Capital will be profitable. A reader reminds us that S&P, in its ratings outlooks, said that GE Capital would post “little or no profit or possibly a ‘modest net loss’ this year and next.” I checked in with S&P analyst Scott Sprinzen the other day, and he reiterated this comment noting 1) that S&P lowered its rating on GECC as a standalone entity from its last outlook. 2) That S&P does have a stable outlook on GE as a whole.

Blogger Peter Cohan writes. So who’s right — S&P or GE?

Cohan sums up investor sentiment well when he writes, “I hope that investors agree with Sherin that GECC will do far better than S&P expects. If so, GE stock may have further to rise. But if GECC offers unpleasant surprises later this year after a $5 billion profit forecast, the credibility of management could be shot.”

11:20

Commercial lending and leasing is up. It’s the largest portion of the asset base. About half is equipment lending and leasing, 17% is leveraged loans, 13% is asset based leasing. Here’s the breakdown.

Detail on the lending book: Most of the book is in senior secured debt, which is a theme running through the presentation. This is one way to think about the book: the division only lends 59 cents against every dollar of recoverable assets. They also provide numbers on their leveraged loan book and equipment leases and loans.

11:33

The equipment residual values: aircraft and fleet cars make up over 60% of the collateral. They’re seeing losses in fleet (in keeping with the economy and peers). and they going to work to mitigate that loss. They have about $1 billion in exposure to the big 3 automakers. Could have potential loss in the $80 million to $150 million range.

11:41

This is the stress test summary for the division; for its large “Americas equipment” segment that has been under duress; and for leveraged loans.

11:44

The restaurant franchise book. This has been another area of weakness and the company puts up a stress case slide for this area, too. Not as much detail for these stress cases, likely because there’s a ton of info to go through.

11:46

Time to go through GECAS, has always been a bright spot for the company, the division that takes care of leasing, financing, and servicing for commercial aircraft with 230 customers in over 70 countries.
Thanks to the recession, a decline in global traffic, and a glut of orders in the past few years, GECAS could be a point of weakness for the company. GECAS execs anticipated this, they say, at the end of 2006 when they “weren’t aware of the words subprime” or the impact that the housing crisis would have on the economy.
They do a good job of going through how historically the unit has weathered downturns in the industry and that they’ve recently been cautious in this segment, giving, as with the other divisions, a slide with their stress case.
But some say questions remain. The past downturns for this division were cyclical problems in the airline industry itself. We’re seeing some of this now, and also seeing intermediaries, the leasing companies, feeling pain due to the credit markets.
They do say they’ll be aggressive with distressed accounts, litigating when necessary.
12:05
Intermission. I’ve been getting some good emails. Please send over more thoughts to kbenner@fortunemail.com

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