What is the expected impact of the new 7.75% coupon on the Company’s cost of capital and equity valuation?

Impact on Cost of Capital

The 7.75 % coupon on the new $50 mm senior note raises GECC’s marginal cost of debt above what most comparable mid‑cap issuers are currently paying (typically 5‑6 % for similar‑rated term paper). Assuming the company’s existing debt carries a lower effective rate, the incremental $48.1 mm of higher‑‑cost borrowing will lift the weighted‑average cost of capital (WACC) modestly. The magnitude of the lift depends on the current debt‑to‑equity mix: if GECC is already lightly‑leveraged (e.g., < 20 % debt/ equity), the added 7.75 % debt will only nudge the overall WACC a few basis points upward. Conversely, a more leveraged balance sheet would see a larger effect because the higher‑cost portion represents a greater share of total financing.

Impact on Equity Valuation

Higher‑‑cost debt does two things to equity value. First, the extra interest expense (≈ $3.8 mm / yr) reduces after‑tax free cash flow, compressing the denominator in a discounted‑cash‑flow (DCF) model. Second, the increase in leverage raises the equity beta (financial risk) and thus the equity‑holder required return, which further depresses the present‑value of future cash flows. In aggregate, the 7.75 % notes are likely to shave a few percent off GECC’s intrinsic equity valuation unless management redeploys the net proceeds into projects whose return on invested capital (ROIC) exceeds the new after‑tax cost of debt.

Trading Implications

• Short‑term: The issuance will be digested as a “new supply” event, creating modest upward pressure on the yield (downward pressure on the note price) and a slight widening of the equity‑risk spread. Expect the stock to face modest selling on the announcement if the market perceives the cost of capital increase as not offset by higher growth.
  
• Medium‑term: Watch how the $48.1 mm is spent. If the capital is used to fund high‑ROIC acquisitions or to refinance more expensive debt, the net impact could be neutral or even positive for equity value, supporting a rebound in the price.
  
• Actionable: Maintain a short‑position on the secondary market for the 7.75 % notes while staying long GECC equity only if the company issues a clear “use‑of‑proceeds” narrative that promises ROIC > 7.75 % × (1‑tax rate). In the absence of that, consider a modest reduction in exposure, targeting a 3‑5 % pull‑back in the equity price over the next 6‑12 weeks.