General Electric Capital, a division of General Electric, uses long-term debt extensively. In a recent year, GE Capital issued $11 billion in long-term debt to investors, then within days filed legal documents to prepare for another $50 billion long-term debt issue. As a result of the $50 billion filing, the price of the initial $11 billion offering declined (due to higher risk of more debt).

Bill Gross, a manger of a bond investment fund, “denounced a lack in candor’ related to GE’s recent debt deal. It was the most recent and most egregious example of how bondholders are mistreated. Gross argued that GE was not forth right when GE Capital recently issued $ 11 billion in bonds, one of the largest issues ever from a U.S. corporation. What bothered Gross is that three days after the issue the company announced its intention to sell as much as $50 billion in additional debt. Warrants, preferred stock, guarantees, letters of credit and promissory notes at some future date.”

In your opinion, did GE Capital act unethically by selling $11 billion of long-term debt without telling those investors that a few days later it would be filing documents to prepare for another $50 billion debt offering?

GE Capital’s action was legal, but caused a great public relations stir at the time. Some quotes:

“A lot of people feel like they have been sorely used,” said one bond fund manager. “There was nothing illegal about it, but it was nasty.”

The fund manager said that GE Capital’s decision to upsize its bond issue to $11 billion from $6 billion midway through the offering ordinarily wouldn’t have upset bondholders.

“But then to find out two days later that they had filed a $50 billion shelf?” he said. “People buy GE because it’s like buying Treasuries, not because they want to get jerked around.”

GE Capital’s action was probably ethical, even though it caused some stir. In its own defense, it stated: In a statement released late Thursday, GE Capital said “with the $11 billion bond issuance of March 13, GE Capital exhausted its existing debt shelf registration; consequently, on March 20, GE Capital filed a $50 billion shelf registration.”

The release said the shelf filing was not an offering and that it would be used in part to roll over $31 billion in maturing long-term debt.In retrospect, GE Capital could have been a little more forthcoming about its financing plans prior to selling the $11 billion on bonds, but there was nothing unethical or illegal about its disclosures.

Source: “GE Capital Timing on $50B Shelf Filing Added to Backlash,” Dow Jones Capital Markets Report, March 22, 2002, Copyright (c) 2002, Dow Jones & Company, Inc.