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.
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.
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.
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