GMAC's $60 Billion Deal Loses Confidence as Mortgages Burn Cash
By Ari Levy and Caroline Salas
June 23 (Bloomberg) -- The 300 bankers gathered at New York's Waldorf-Astoria Hotel last month faced a stark choice: Accept Sam Ramsey's plea to restructure $60 billion of GMAC LLC's debt or risk pushing the lending arm of General Motors Corp., the largest U.S. automaker, to the brink of insolvency.
``There was not room for slippage,'' said Ramsey, 49, a former Bank of America Corp. executive who joined Detroit-based GMAC in September and became chief risk officer two months later. He pulled it off as banks led by New York-based JPMorgan Chase & Co. and Citigroup Inc. provided GMAC and its Residential Capital LLC mortgage unit with the biggest restructuring package since the credit-market rout began a year ago.
Whether that's enough to ride out the worst housing slump since the Great Depression remains in doubt. Moody's Investors Service cut GMAC's credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters.
``ResCap presents a very significant risk,'' said Mark Wasden, the lead GMAC analyst at Moody's. ``There is no easy exit from their difficulties right now. We think the company will yet again find itself in need of additional cash.''
Credit-default swap prices give ResCap a 100 percent chance of default within the next five years, based on a JPMorgan model. It was 98 percent before the debt agreement was announced.
Bigger Than Bear
GMAC, started 89 years ago by GM, has 27,000 employees, twice the number that Bear Stearns Cos., the fifth-biggest U.S. securities firm, had when it was rescued in March by JPMorgan. GMAC's $250 billion in assets makes it bigger than Countrywide Financial Corp., the biggest U.S. mortgage company by loans, which is being bought by Bank of America. Investors had speculated that ripple effects from those potential failures could have spread to the rest of the U.S. financial system.
GMAC's latest rescue effort began May 2 at 6:30 a.m. New York time, when ResCap released a statement saying it would offer as little as 80 cents on the dollar to exchange or buy back $14 billion of bonds to delay maturities and reduce debt.
Shortly before 9 a.m., bankers filtered into the Waldorf's Starlight Roof on the 18th floor, where Guy Lombardo and his Royal Canadians once serenaded New Year's revelers. As attendees sipped coffee and munched pastries, JPMorgan Vice Chairman James Lee kicked off the event. Then it was the turn of GM Chief Operating Officer Fritz Henderson. Next was Stephen Feinberg, the founder of Cerberus Capital Management LP, who had been instrumental in leading the $7.4 billion purchase of 51 percent of GMAC in 2006.
Separated from the automaker, GMAC's credit rating was supposed to rise from junk, which would have lowered borrowing costs. Instead, the ResCap unit was hit by a cash crunch as subprime home loans started to default. The Minneapolis-based housing unit lost more than $4.3 billion last year, contributing to a $2.3 billion loss for GMAC. ResCap's subprime loans totaled $32.8 billion in March, compared with $36.8 billion at the end of 2007, according to a company filing.
The number of Americans in danger of losing their homes to foreclosure rose to the highest in at least three decades during the first quarter, according to data from the Washington-based Mortgage Bankers Association.
``It was when the problems started at ResCap that the GMAC ratings got pulled down,'' said Wasden, the Moody's analyst. ``You could see how, absent ResCap-related problems and some capital-building, they could march up in the speculative-grade ratings profile.''
Not Just Talk
After Feinberg spoke at the Waldorf meeting, it was Alvaro De Molina's turn. De Molina was an executive at Charlotte, North Carolina-based Bank of America until 2006 and was appointed GMAC's chief executive officer in March. Ramsey, a 25-year banking industry veteran, then finished up the morning session with a 20-minute talk.
``It was the first time some of the lenders had the opportunity to see that management did have a plan for continued success,'' said Chad Leat, chairman of Citigroup's Alternative Asset Group in New York, who attended the meeting and led Citigroup's underwriting of the loans. ``It was the first opportunity to hear and see the visible support, not only with words, but also with money from GM and Cerberus.''
Following a 10-minute lunch break, Ramsey, Leat and other executives broke into groups to take more specific questions. The central theme: Keep ResCap afloat long enough to take advantage of an eventual recovery in the housing market after more than 100 mortgage companies closed down, halted operations or sold themselves since the start of 2007. ResCap ranked eighth among U.S. home-lenders last year.
``If there was a sales pitch, it was a very simple one: This management team is turning this company around, ResCap specifically,'' Leat said. ``They have a plan and they are going to need liquidity to finance growth. And we're going to give you the following goodies in exchange.''
JPMorgan's Lee wrapped up the day at about 3 p.m. Over the next month, with GMAC's future hanging in the balance, Ramsey, de Molina, Lee, Leat and Feinberg hit the phones to make certain the banks understood the terms.
On June 4, GMAC replaced $6 billion of unsecured revolving credit lines, half of which were scheduled to mature this month, with an $11.4 billion secured revolving credit line that matures in three years. It also renewed a one-year $10 billion commercial paper agreement, and ResCap got a one-year extension on $11.6 billion of bank loans.
``Put yourself in the shoes of some of the institutions who are raising capital to address their perceptions of deficiencies, facing markets that are not as liquid as they used to be,'' Ramsey said. ``This is the type of credit that in many cases has to go to the highest approval processes.''
As a lender, Citigroup liked the deal because it was able to swap unsecured commitments for secured ones, Leat said.
Citigroup, the biggest U.S. bank by assets, raised $44.1 billion of capital in the past year after reporting $42.9 billion of writedowns and credit losses from the collapse of the subprime market, data compiled by Bloomberg show. GM has been a client of Citigroup for more than 90 years, and Leat worked on the financing for Cerberus's GMAC purchase.
ResCap got a $3.5 billion two-year credit facility from GMAC, with the first $750 million guaranteed by Cerberus and GM. ResCap needed the loan to finance its bond tender offer, which lured investors holding about $9.5 billion of notes. Bondholders who exchanged their debt for longer-maturity securities are now senior to those who didn't and have a claim on the mortgage- lender's assets.
In addition to financing the bond exchange, GMAC and Cerberus agreed to pony up another $2.88 billion of funding for ResCap after the lender fell $2 billion short of meeting its debt obligations this month because it couldn't sell assets to raise cash.
``This was as hard and as complicated as anything I've done and I've been doing this around the clock for 17 years,'' said Timothy Pohl, co-head of the restructuring practice at Skadden, Arps, Slate, Meagher & Flom LLP in Chicago, which represented ResCap in the deal. ``There were a lot of legitimate concerns about whether it could possibly be accomplished.''
ResCap must still come up with enough cash to repay $3.5 billion of bonds and the $3.5 billion loan from GMAC in 2010. It may find GM and Cerberus unwilling to continue pouring money into it, according to Wasden at Moody's. ResCap has already returned for capital infusions at least three times in two years.
``This probably does buy them some time to continue to restructure and improve longer-term prospects,'' said Christopher Wolfe, an analyst at Fitch Ratings in New York, which reduced ResCap's debt to D from C after the deal, indicating default. ``It's still a very uncertain story.''
To contact the reporters on this story: Ari Levy in San Francisco at firstname.lastname@example.org; Caroline Salas in New York at email@example.com.
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