Reply #14: GMAC Buys Time for ResCap Unit as Threat of Bankruptcy Looms

[DemReadingDU]

May 6 (Bloomberg) -- GMAC LLC, the car and home lender struggling to avert bankruptcy for Residential Capital LLC, may keep the mortgage business afloat long enough to find a buyer or break it up.

ResCap, after recording $5.3 billion in losses over the past six quarters, said on May 2 that it is seeking a $3.5 billion loan from GMAC as part of a bigger financing agreement. Less than a month ago, GMAC provided a $750 million credit line.

``That doesn't mean the business is necessarily coming back,'' said Christopher Wolfe, an analyst at Fitch Ratings in New York, which downgraded GMAC and ResCap debt last week. ``Rather than throw everything into a bankruptcy court and everyone scrambles for how to liquidate the assets, maybe you can sell certain assets or parts of the business.''

Unable to lend to subprime borrowers or bring in new business in Europe, ResCap reported an $859 million first-quarter loss last week, wiping out GMAC's profit from its auto-finance business. GMAC is owned by General Motors Corp. and an investor group led by Cerberus Capital Management LP.

The subprime meltdown has forced more than 100 mortgage companies to suspend operations, close or sell themselves since the start of 2007. Lenders including New Century Financial Corp. and American Home Mortgage Investment Corp. have gone bankrupt, while Countrywide Financial Corp. agreed to be bought.

Facing a dwindling supply of cash, ResCap, the eighth- largest U.S. residential lender in 2007, started offering as little as 80 cents on the dollar yesterday to exchange or buy back $14 billion of bonds that will push back maturities until 2010 or 2015.

GMAC's Contribution

GMAC, which has already injected more than $2 billion into ResCap, is negotiating terms of a $3.5 billion loan and hasn't committed to the financing. ResCap also wants GMAC to contribute $350 million of ResCap notes outstanding to the mortgage lender by the end of the month and give it $150 million more under an existing credit facility.

Even with the funding, ResCap said yesterday that it may not be able to meet debt obligations unless it comes up with an additional $600 million by the end of June. GMAC is already pursuing asset sales to help meet near-term obligations, spokeswoman Toni Simonetti said.

GMAC may help ResCap avert bankruptcy as it awaits a rebound of either the acquisitions market or the mortgage business, said Mirko Mikelic, portfolio manager at Fifth Third Asset Management, which oversees $22 billion in Grand Rapids, Michigan.

`Very Tough Situation'

``They're just looking to get more time and hopefully one of these markets will recover,'' said Mikelic, whose firm does not own GMAC or ResCap bonds. ``Right now, they're in a very tough situation where they've got a lot of debt coming due and their moves are limited.''

The value of announced U.S. acquisitions fell to $255 billion so far in 2008 from $608 billion in the same period a year earlier, according to Bloomberg data.

Last week, Gimme Credit analyst Kathleen Shanley said in a report that ResCap was on ``deathwatch,'' because it can't pay debt due in 2008. ResCap said yesterday that a ``significant amount'' of its cash has dwindled in recent weeks, and was at $1.8 billion as of Feb. 29, compared with $4.4 billion of unsecured long-term debt maturing this year.

Fitch, Standard & Poor's and Moody's Investors Service cut their ratings on ResCap's debt following the exchange offer. S&P said the company's debt is ``highly vulnerable to nonpayment.''

GMAC's Roots

GMAC, formed by GM in 1919 to make it easier for customers to buy vehicles, entered the mortgage business in 1985. From 2002 to 2005, GM made more money from auto loans and mortgages than from building cars and trucks.

GM, the world's largest automaker, sold a 51 percent stake in GMAC to the investor group led by Cerberus in 2006 as part of a plan to protect it from the car company's declining credit outlook. GM has no further obligations to fund GMAC.

``GM has already stepped up but they're not going to want to continue to do that if ultimately ResCap is going to have to file'' for bankruptcy, Mikelic said.

GM spokeswoman Renee Rashid-Merem didn't respond to calls for comment.

ResCap was the nation's eighth-largest home lender in 2007, according to January data from trade publication Inside Mortgage Finance. The year before, at the height of the industry's boom, ResCap ranked 12th among subprime lenders.

Subprime loans are made to people with weak credit and have the highest default rate. Overdue subprime loans set a record last year.

ResCap's $1.75 billion of 6.5 percent notes due in 2013 fell 2.25 cents to 52.25 cents on the dollar yesterday in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes yield 26.8 percent, or about 24 percentage points more than similar-maturity Treasuries, Trace data show.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aqjKRhKbbFfI&refer=home