GMAC seeks last refuge

Fighting for its survival, GMAC has grabbed the only lifeline available – filing to become a bank holding company, with the goal of tapping the US$700bn Troubled Assets Relief Program, accessing the Fed’s discount window and possibly offering new debt with FDIC guarantees.

GMAC, owned 51% by Cerberus and 49% by General Motors, applied with the US Federal Reserve Board to become a bank holding company, seeking to transform its GMAC Bank into a Utah-chartered Federal Reserve member commercial bank. The bank is currently classified as an industrial bank chartered in Utah.

Before offering GMAC a lifeline, however, the Federal Reserve is requiring GMAC to have US$30bn of outstanding capital. In an effort to boost its capital, GMAC is asking its bondholders to swallow a US$35bn debt exchange on the heels of a US$60bn debt restructuring in June.

GMAC bondholders have been expecting the company to offer a debt exchange to help it meet capital requirements, but many who were expecting to see a better coupon were disappointed with the initial offer.

GMAC is seeking to swap US$28.7bn in senior guaranteed notes across 19 series for about US$22bn in new senior notes plus preferred shares. If all noteholders take the cash option on the existing notes, the offer would represent US$10bn towards GMAC’s capital goal. The maturities and coupons on the debt remain the same.

GMAC is also taking another run at Residential Capital debt, offering an exchange that represents a 45% haircut for bondholders holding debt with a face value of US$9.3bn. ResCap debt maturing in April and May took the biggest hit, with no possibility of taking a cash settlement. The discount offer for ResCap debt was so drastic Moody’s considered it a default.

To entice ResCap bondholders to take such a steep discount, GMAC is offering to swap ResCap notes for a significantly reduced amount of GMAC notes. Several bondholders have read this offer as a direct warning that a ResCap bankruptcy filing is likely.

Moody’s said the transaction illustrated that ResCap could not produce the required cash flow to service and repay its obligations. Indeed, ahead of its request to become a bank holding company, GMAC committed to provide ResCap with another US$500m in liquidity improvements.

The debt exchange only gets GMAC part of the way towards meeting its goal of US$30bn: the company had about US$9bn at the end of the third quarter. The Fed has mandated that it raise at least US$2bn in new Tier 1 capital. The company may be allowed to access the TARP for US$5bn–$6bn.

The debt exchange will get GMAC between US$6bn and US$10bn, depending on the number of bondholders that elect to take the cash offer. Estimates vary, but the current plans on the table leave the company between US$3bn and US$5bn short. Ahead of the exchange offer, bondholders estimated that GMAC would need to raise between US$3.8bn and US$7.5bn.

As it asked bondholders to tender into the debt exchange, GMAC said its funding strategy and liquidity position had been adversely affected by the ongoing stress in the credit markets.

It said it had been unable to access the unsecured debt markets in a cost-effective manner, and had also failed to renew some of its material committed facilities, putting additional pressure on its liquidity position. The company said it had about US$500m of capacity under its secured credit lines.

If its plan to become a bank holding company fails, GMAC itself may be facing collapse. Bondholders have until December 18 to tender.