General Electric Co. is refinancing $5 billion of debt even asit expects to generate $100 billion of cash in the next four years,showing confidence in its ability to invest at returns four timesits borrowing costs.

The biggest maker of power-generation equipment sold $7 billionof bonds yesterday at an average 2.58 percent yield in the parentcompany's first issue in almost five years. That compares with a 12percent return that Chief Executive Officer Jeffrey Immelt saidlast week the Fairfield, Connecticut-based firm generates on itscapital.

The offering allows the company to use the cash it brings in forstock buybacks, dividends and acquisitions. While Immelt seeks topare debt at GE's finance arm, the offering may boost bonds of theparent by 22 percent to $11 billion next year.

“It's a no-brainer,” Jody Lurie, a corporate credit analyst atJanney Montgomery Scott LLC in Philadelphia, said in a telephoneinterview. “It costs nothing to issue, so why would they use cashon hand” to pay off maturing obligations?

GE borrows at lower rates than the average for U.S.investment-grade issuers, whose bond yields dropped to anunprecedented 2.85 percent yesterday, according to Bank of AmericaMerrill Lynch index data. That compares with 2.62 percent for GE,which includes yields on obligations of its finance arm GECapital.

“GE and GE Capital have always been opportunistic aboutaccessing markets and pre-funding maturities,” Seth Martin, aspokesman for GE, said in an e-mail. “This GE issuance isconsistent with that strategy, particularly with interest rates athistorically low levels.”

GE Capital, the financing arm, has issued $21.9 billion ofcorporate bonds worldwide this year while facing about $80 billionin maturities, according to Bloomberg data and a December 2011 GEinvestor presentation.

By adding $3 billion of 2.7 percent, 10-year bonds and equal $2billion portions of 0.85 percent, three-year debt and 4.125 percentsecurities maturing in 2042 to its balance sheet, GE will be payingbondholders to push out its debts even after Immelt told analystsand investors he expects the company to generate about $100 billionof cash through 2016, according to a transcript of a Sept. 27meeting at the company's leadership center in Ossining, NewYork.

Notes Rise

“GE probably figures they have better uses for their cash atthis point than paying off parent-level debt,” Kathleen Shanley, ananalyst at bond research firm Gimme Credit LLC, said in an e-mail.“It is logical for the company to want to refinance this offering,especially given the current rock-bottom interest rateenvironment.”

Investors who purchased the bonds at issue prices have seentotal gains of more than $150 million in less than a day. GE's 2.7percent securities have increased about 1.8 cents on the dollar to101.5, yielding 2.53 percent at 10:55 a.m. in New York, accordingto Trace, the bond-price reporting system of the Financial IndustryRegulatory Authority. The 30-year, 4.125 percent bonds are up about5 cents to 104.6 with a 3.87 percent yield.

GE may also be taking advantage of low interest rates to raisedomestic funds while avoiding U.S. repatriation tax on the cash thecompany holds overseas, according to Janney Montgomery's Lurie andAlan Shepard of Madison Investment Holdings Inc. About $53 billionof the company's $74 billion of cash and equivalents were heldoutside the U.S. as of June 30, according to a quarterly regulatoryfiling.

“Companies with substantial cash balances outside the U.S. arelooking to get it back here cheaply,” Shepard, whose Madison,Wisconsin-based firm oversees about $16 billion including GE debt,said in an e-mail. “With rates as low as they are, debt issuance isa straightforward way to do it.”

GE had $8.6 billion of cash at the end of June, compared with$66.3 billion held by GE Capital, the filing said.

Most of the new cash generated through 2016 will be used toreward shareholders through equity dividends, stock buybacks andacquisitions, Immelt said. While free cash flow at the companydeclined 21 percent to $20.7 billion last year, the money availableto reward equity owners and to use to reduce debt is above the $16billion recorded in 2009, Bloomberg data show.

Cash Transfers

GE Capital also resumed cash transfers to its parent company inMay that were suspended in the aftermath of Lehman BrothersHoldings Inc.'s collapse. It paid a special dividend of $4.5billion and initiated a quarterly payout of $450 million.

Restarting the internal dividend was a milestone in GE Capital'srecovery from the financial crisis, during which the unit sufferedcredit losses of about $32 billion, according to a presentationprepared for the company's April 25 annual meeting. Immelt has saidhe wants to shrink the division's balance sheet and decrease itsshare of GE's earnings.

Moody's Investors Service cut its debt rating on GE one step toAa3 on April 3, citing “heightened risk” from the finance unit,whose own grade is lower than the parent company's for the firsttime in two decades at A1. The reductions concluded a review begunMarch 19 after Moody's revised the criteria for financial companyratings.

The new rating reflected “the impact of GE Capital's higher riskprofile on GE,” in part the funding arm's reliance on access todebt markets, Moody's said. S&P rates GE and General ElectricCapital AA+.

GE Capital operating profit of $2.12 billion in the secondquarter accounted for 36 percent of the total, according to datacompiled by Bloomberg. That compares with 48 percent in all of2007, before credit markets froze. The company's goal is for thefinancial unit to contribute as little as 30 percent of earnings,according to a presentation at the analyst meeting.

“We've got more discretionary cash around the company than anytime I can remember,” Immelt said. “We think that's the right placeto be, disciplined buybacks, smart share repurchases, focusedacquisitions. We're going to have a lot of cash and we're goingdemonstrate superior capital allocation.”

Immelt is working to boost GE shares that cost more relative toearnings and sales than the Standard & Poor's 500 index evenafter a decade of lagging returns by focusing on units that makejet engines, diesel locomotives and medical imaging equipment toexploit infrastructure demands in faster-growing emergingmarkets.

PE Ratio

GE's price-to-earnings ratio of 16 compares with an index valueof 14.7, and its 1.7 sales multiple exceeds 1.4 for the S&P500. The company had lost 18 percent including reinvested dividendssince Immelt took the helm on Sept. 7, 2001 through last week,compared with a 65 percent gain for the S&P.

While GE may resort to debt-financed shareholder rewards if itscurrent strategy doesn't meaningfully boost its stock performance,yesterday's bond sale still leaves the company with an “extremelyhealthy” financial profile, Hitin Anand, an analyst at CreditSightsInc. in New York, wrote in a report.

“It lets the cash generation be there for other things,” Anandsaid in a telephone interview. “Not having any debt in this marketenvironment would just not be a prudent capital structure decisionfor them.”

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