General Electric (GE) - Blow through Debt Covenants ?

FT reported

GE Capital may trip a fixed-charge covenant in its debt agreements late next year that would prompt its parent to infuse additional cash into the business. On the call, Keith Sherin, GE’s chief financial officer, said the company could earmark $2bn to $7bn for the finance arm in 2011.

Gudovac's back-of-the-envelope calculation is that GECC will need $9 Billion from the Industrial side over the next 30-36 months.  This is significantly more than the $2 - $7 Billion Management estimates.  Both Gudovac and Management agree that the Industrial side can fund the losses over at the Capital side without destroying the Enterprise. 

However, any Owner should pause carefully when he hears the phrase "violate debt covenants". Covenants are financial datums whose violation indicate very high risk.

Gudovac can not stress enough that violation of Covenants is a rather expensive proposition.  Violation of Debt Covenants triggers a avalanche of measures from Creditors. These measures limit Management's ability to operate normally.  It completely changes the operating environment for Management. 

GE's management believes a straightforward cash infusion will solve the pending crisis. GE's financial managers are first rate. Therefore, Owners can give them the benefit of the the doubt. 

However, Owners should continue to carefully monitor this subject and be prepared to take quick action if the cash infusion becomes greater than $9 Billion over 30-36 months.

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Don't Get Massacred !

Gudovac1941

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