GE Investors Said to Fight Forced $5 Billion Securities Swap

Holders of preferred shares in General Electric Co.’s finance unit are revolting against the company’s decision to exchange $5 billion of the securities for notes the investors say are less valuable, according to people with knowledge of the matter.

About 70 holders of the company’s preferred securities convened on two calls this week to discuss how to extract better terms from GE, said the people, asking not to be identified because the matter is private. Many of the investors have complained directly to the company, they said.

The industrial giant announced earlier this year that it would sell the majority of the assets in its finance unit, GE Capital, to focus more on its core businesses. As part of the reorganization, it revealed plans on Dec. 1 to exchange three different series of preferred shares -- hybrid securities with elements of debt and equity -- for similar securities with lower coupons. It is offering a premium on the face value of the securities to compensate for the lower interest rate.

GE has told investors that it has a right to carry out the exchange because, based on its calculations, the new obligations will be equal or greater in value to the existing shares, according to people familiar with the company’s reasoning. Holders of the existing preferred equity aren’t entitled to vote on or consent to these transactions, the company said in the Dec. 1 statement.

“The GE Capital board followed a thorough process in approving the new terms, and we believe shareowners are getting a fair value for their existing shares,” said Seth Martin, a spokesman for the company.

But the preferred holders argue the original covenants on the perpetual shares didn’t allow for an exchange, the people said. Investors are also frustrated at the company’s push to change terms just three years after selling the securities that aren’t callable until 2022. 

GE’s $2.25 billion of 7.125 percent preferred shares that were trading at about 119 cents on the dollar plunged 6.6 cents after the company announced plans to exercise the exchange. The new 4 percent shares are trading at less than 90 cents on the dollar, reflecting investor concerns that the preferred shareholders are not being adequately compensated.

The shareholders contend the exchange puts GE in breach of its covenants and are considering plans to complain to regulators if the company doesn’t provide concessions, according to people on the investor calls.

CreditSights Inc. analyst Jesse Rosenthal wrote in a Dec. 1 research report that while investors dependent on annual income will be hurt by a lower coupon, they will also realize immediate capital appreciation through an increase in the principal. 

Investors do have the option of assessing the fair value of the existing preferreds in the Delaware Court of Chancery, Rosenthal said in the report. Any investor exercising that right would run the risk of receiving a ruling of lower value than the new securities, he said.