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GE Says Defaults May Reach 10%

NEW YORK CITY-Executives of GE Real Estate told investors Thursday that a stress test predicted more defaults on its portfolio if the economy worsens.

By Paul Bubny | Updated on March 19, 2009

NEW YORK CITY-The debt-default rate on real estate loans in GE Capital’s portfolio could rise to 10% this year if the economy worsens, company executives said at an investor meeting here on Thursday. However, executives also pointed out that GE Real Estate’s debt default rate on construction and development loans in the fourth quarter of 2008 was 1.2%, compared to 5.4% for commercial banks.

The potential 10% default rate was based on a stress test using the federal baseline assumption for the economy. Should the US unemployment rate and GDP deteriorate sharply–i.e. a jobless rate of 10% and a 3% decline in GDP–the default rate for GE’s commercial real estate loans could reach 8% or as much as 10%, representing a loss of $900 million to $1 billion for ’09. In a PowerPoint presentation accompanying the investor conference, GE Capital calculated that the effect of more adverse assumptions for the GDP and unemployment would translate into a 15% decline in rents for US office markets and a 16% drop in NOI over two years.

One factor in the lower default rate, company executives said Thursday, was a lack of construction and development loans in GE’s portfolio. C&D loans represent 32% of commercial banks’ real estate portfolios, compared to 1.5% in GE’s. The Norwalk, CT-based company also avoids “other higher risk asset classes and structures,” including second mortgages, mezzanine lending, malls and resorts, according to Thursday’s presentation.

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