Barclays Downgrades GE Unit Debt

Investment firm Barclays Capital downgraded the debt of GE Capital Corp., the finance arm of General Electric (NYSE: GE)  to “underweight” from “market weight” on Tuesday, citing the company‘s $6.6 billion of reserves as “inadequate” compared with large banks such as Bank of America Merrill Lynch (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and Citigroup Inc, (NYSE:C).

GE Capital’s loan-loss reserves, which are designed to protect against losses on its loans, as a percentage of finance receivables is 1.8%, among the worst in the financial-services industry, Bloomberg said, citing a report by Barclays analysts.

“This amount increased in the past year as the economy soured and the prospect of future losses grew,” [the report said].“But it has not increased enough, in our opinion, and reserves are inadequate..” [Bloomberg]

GE Capital raised its reserves to $6.6 billion from $5.7 billion in Q1’09 to cover anticipated increases in lending losses. The unit’s current balance sheet is at nearly mid-$600 billion levels, which classifies it as a T1 financial holding company.

While the GE’s financial arm did not receive help from the Treasury’s TARP, it was one of the largest users of an FDIC program to guarantee its debt. It used those guarantees on more than $40 billion of the debt it issued.

With CIT Group (NYSE:CIT) struggling, parallels are being drawn between the beleaguered commercial lender and GE’s financial arm. GE Capital however, still has the backing of parent GE. In addition, the financial unit has already raised about one-third of the funding it needs for 2010. Having said that though, GE Capital’s performance is anything but impressive. It caused the parent company to lose its triple-A corporate debt rating in March, and to cut its dividend to preserve capital.

On July 17 the conglomerate said its Q2’09 sales fell more than the Street predicted, while earnings at GE Capital fell a whooping 80%.

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