GE, Goldman Bond Spreads: Unrealistic and Unsustainable

Following the recent decline in Libor rates, the yield (10%) on Warren Buffett’s preferred stock investment in General Electric (GE) and Goldman Sachs (GS) is now appearing to be entirely in line with the evolving reality of corporate debt: that effective interest rates should incorporate perceptions of default risk. But bond traders in the US marketplace are obviously unwilling to accept that credit default swap spreads should be playing an integral role in determining yields for longer-dated General Electric and Goldman Sachs maturities.

To reconfirm a trend witnessed in the recent financing structures for FirstEnergy Corp. (FE), Nokia (NOK) and Nestle [NESN.VX], Borse Dubai Ltd., the state-owned operator of exchanges, is now in talks with bankers to refinance $4.2 billion of loans at a cost of 6%-plus over Libor, a cost derived from the CDS spread on Borse Dubai, in addition to the cost of funds. Last year, Borse Dubai was able to raise money at a margin of 1.1% over Libor when it purchased Sweden’s OMX AB.