US CREDIT-After capital boost, GMAC still faces GM risk

By Karen Brettell

NEW YORK, Dec 29 (Reuters) - Although GMAC LLC's debt has
been boosted since the Federal Reserve approved it as a bank
holding company, the auto lender still faces steep hurdles
because its fortunes are tied to General Motors Corp (GM.N).

The U.S. Federal Reserve's approval on Wednesday of GMAC as
a bank holding company paves the way for the company to access
the Treasury-run financial bailout package, easing capital
concerns at the company. For details, click on [ID:nN24278654]

GMAC may have applied for up to $6 billion in funds from
the government's financial bailout program, and could
potentially sell $17.5 billion in government-backed debt to
shore up its capital position, CreditSights analysts Richard
Hofmann and Adam Steer said in a report.

Credit default swap costs protecting GMAC's debt plunged by
more than 20 percentage points on the news to around 24 percent
the sum insured, or $2.4 million to insure $10 million for five
years, plus annual payments of 5 percent.

GMAC has been trying to raise capital in a debt exchange,
which was originally intended to help its chances of obtaining
bank holding status.

The Fed's approval made the result of the exchange less
important. GMAC on Monday said it would announce the result of
the exchange, which expired on Friday, "in the near term."

"With the primary regulatory on board, the capital raise
machinations seem almost a moot point," CreditSights said.

GENERAL MOTORS

A more pressing concern is GMAC's dependence on GM.

GM is burning through cash as it struggles to restructure
its business, while demand for cars dries up.

"GMAC still has a lot of challenges, primarily the parent
company's ability to generate receivables for them," said
Ricardo Kleinbaum, analyst at BNP Paribas in New York.

The U.S. government earlier this month agreed to bail out
GM and Chrysler LLC with $17.4 billion of emergency loans and
set a deadline of March 31 for the companies to prove they can
restructure enough to ensure their survival or have the loans
called back. [ID:nSP155126].

In addition to other challenges, the loans may be
insufficient to fund GM while it restructures.

That means GM may yet again find itself at the mercy of the
government as it seeks extra funding.

"For the automaker, recent government bridge loans should
delay bankruptcy talk until spring, but limited scale,
ambiguous terms and uncertainty surrounding the new
administration's game plan likely ensure that we have not heard
the last of the GM bankruptcy debate," the CreditSights
analysts said.

"We believe GMAC requires an operating GM (in or out of
bankruptcy) in order to avoid a similar fate," they added.

RESCAP

The fate of GMAC's mortgage servicing arm, Residential
Capital LLC, is also unclear, as the company continues to bleed
from losses from risky residential mortgage loans.

GMAC is poised to take control of its GMAC Bank unit from
Rescap via a series of transactions if its bond exchange is
successful.

Alternatively, the company may exercise options to convert
its preferred membership interest in ResCap into preferred
stock at GMAC Bank's parent, IB Finance, after Jan. 1, which
would give it control over the company.

"Since owning a bank is a requirement for being a bank
holding company, we believe ResCap's fate may rest on GMAC's
ability to strip GMAC Bank away from ResCap," said
CreditSights' Hofmann and Steer.

ResCap's CDS have been roiled in recent months on
speculation that GMAC may file ResCap for bankruptcy protection
after exercising the convertible option in the new year.

GMAC's approval as a bank holding company may complicate
this plan, however.

"The risks of a GMAC/ResCap bankruptcy or liquidation are
greatly reduced," said BNP's Kleinbaum. "A mandatory debt
restructuring would also seem very unlikely for an entity that
is now regulated by the Fed."

As housing markets continue to decline and mortgage
delinquencies increase, there may be a limit to how long GMAC
can continue to support the mortgage servicer, CreditSights
said. ResCap's run-rate losses are around $2 billion a quarter,
which is rapidly eroding ResCap's equity value.

"Outside of GMAC Bank, the fate of ResCap is murky," the
analysts said.