GE 2007 Annual Report Download - page 103

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ge 2007 annual report 101
Counterparty credit risk
We manage counterparty credit risk, the risk that counterparties
will default and not make payments to us according to the terms
of the agreements, on an individual counterparty basis. Thus,
when a legal right of offset exists, we net certain exposures by
counterparty and include the value of collateral to determine the
amount of ensuing exposure. When net exposure to a counter-
party, based on the current market values of agreements and
collateral, exceeds credit exposure limits (see following table), we
take action to reduce exposure. Such actions include prohibiting
additional transactions with the counterparty, requiring collateral
from the counterparty (as described below) and terminating or
restructuring transactions.
Swaps are required to be executed under master agreements
containing mutual credit downgrade provisions that provide the
ability to require assignment or termination in the event either
party is downgraded below A3 or A–. In certain cases we have
entered into collateral arrangements that provide us with the
right to hold collateral (cash or U.S. Treasury or other highly-rated
securities) when the current market value of derivative contracts
exceeds a specifi ed limit. We evaluate credit risk exposures and
compliance with credit exposure limits net of such collateral.
Fair values of our derivatives assets and liabilities represent
the replacement value of existing derivatives at market prices
and can change signifi cantly from period to period based on,
among other factors, market movements and changes in our
positions. At December 31, 2007, our exposure to counterparties,
after consideration of netting arrangements and collateral, was
about $2,000 million.
Following is GECS policy relating to initial credit rating
requirements and to exposure limits to counterparties.
COUNTERPARTY CREDIT CRITERIA
Credit rating
Moody’s S&P
Foreign exchange forwards and other
derivatives less than one year P–1 A–1
All derivatives between one and fi ve years Aa3
(a) AA– (a)
All derivatives greater than fi ve years Aaa
(a) AAA (a)
(a) Counterparties that have an obligation to provide collateral to cover credit exposure
in accordance with a credit support agreement must have a minimum A3/A– rating.
EXPOSURE LIMITS
(In millions)
Minimum rating Exposure
(a)
Without
With collateral collateral
Moody’s S&P arrangements arrangements
Aaa AAA $100 $75
Aa3 AA– 50 50
A3 A– 5 —
(a) For derivatives with maturities less than one year, counterparties are permitted to
have unsecured exposure up to $150 million with a minimum rating of A–1/P–1.
Note 27
Off-Balance Sheet Arrangements
We securitize fi nancial assets in the ordinary course of business
to improve shareowner returns. The securitization transactions
we engage in are similar to those used by many fi nancial institu-
tions. Beyond improving returns, these securitization transactions
serve as funding sources for a variety of diversifi ed lending
and securities transactions. Historically, we have used both GE-
supported and third-party entities to execute off-balance sheet
securitization transactions funded in the commercial paper and
term bond markets. Assets in off-balance sheet securitization
entities amounted to $55,113 million and $46,105 million at
December 31, 2007 and 2006, respectively.
In a typical securitization transaction, we sell assets to a special
purpose entity, which has obtained cash by issuing benefi cial
interests, usually debt, to third parties. These benefi cial interests
are credit enhanced, normally through over collateralization, but
also with other forms of liquidity and credit support arrangements.
Assets in off-balance sheet securitization entities comprise
the following:
December 31 (In millions)
2007 2006
Receivables secured by
Equipment $ 6,552 $ 7,568
Commercial real estate 9,244 7,865
Residential real estate 204 —
Other assets 12,880 13,257
Credit card receivables 22,793 13,497
Trade receivables 3,440 3,918
Total securitized assets
(a)(b)
$55,113 $46,105
(a) At December 31, 2007 and 2006, liquidity support amounted to $2,810 million and
$753 million, respectively. The December 31, 2006, amount is net of $3,034 million
deferred beyond one year. Credit support amounted to $2,804 million and $3,815
million at December 31, 2007 and 2006, respectively.
(b) Liabilities for recourse obligations related to off-balance sheet assets were $2 million
and $15 million at December 31, 2007 and 2006, respectively.
Gross securitization gains amounted to $1,812 million in 2007,
compared with $1,187 million in 2006 and $1,051 million in 2005.