GMAC Waiting to Issue Debt

Story from the Wall Street Journal

More than three months after turning itself into a bank, GMAC LLC is still waiting for the green light from regulators to issue debt crucial to its funding plan.

GMAC, the former financing arm of General Motors Corp., is seeking the go-ahead from the Federal Deposit Insurance Corp. to sell cheaply priced debt insured by the FDIC as part of the Temporary Liquidity Guarantee Program.

This program has allowed an array of financial institutions, ranging from Citigroup Inc. to General Electric Co.'s General Electric Capital Corp., to raise financing when they were otherwise shut out from repaying or refinancing debt as a result of the credit crisis. Qualifying financial firms have so far raised $238.2 billion of government-backed bonds or surety bonds since this program was announced in October, according to data provider Dealogic.

GMAC has $30.6 billion of debt maturing in 2009, including $11.8 billion of unsecured debt. Gaining access to cheap capital through TLGP was a major driving force behind the cash-strapped lender's bank registration in December.

"Despite becoming a bank, GMAC is squeezed for capital," says Mark Wasden, an analyst at Moody's Investors Service. GMAC unsecured debt is rated the lowest of 19 credit rankings by Moody's, just a step up from default. Moody's outlook on this rating suggests it could be bumped up.

The ability to issue FDIC-backed debt would "represent real liquidity. GMAC needs that today," Mr. Wasden says. The lender could raise as much as $12 billion through the TLGP, according to Moody's initial estimates using FDIC guidelines. "It's a potentially sizable amount," Mr. Wasden says. The amount GMAC may issue could differ based on the FDIC's decision.

"We have an application pending with the FDIC," says Gina Proia, a GMAC spokeswoman. "We are in the process of responding to requests for additional information."

An FDIC spokeswoman said GMAC's application "is currently under review," while declining to comment on specific details.

To be sure, GMAC does have access to other forms of federal funding: It got $5 billion under the U.S. Treasury's Troubled Asset Relief Program. GMAC Bank, as of the end of 2008, had used up $10 million of a $4 billion credit line from the Federal Reserve. The lender also is exploring ways to tap the government's Term Asset-Backed Securities Loan Facility, or TALF, aimed at reviving lending to consumers.

In addition, deposits at GMAC Bank grew by one-third, to $19.2 billion, as of Dec. 31, 2008, compared with a year earlier. The lender also shored up its capital base through a $38 billion debt exchange in November.

But concerns persist around GMAC's finances because of continuing potential losses at its auto-finance and mortgage units; its hefty debt burden; restrictions on its lending practices because of its new status as a bank; and debt and capital levels the lender must comply with as a bank.

GMAC is jointly owned by GM and an investor group led by private-equity firm Cerberus Capital Management LP. The auto maker and the investor group will significantly scale back their ownership in GMAC as a condition of the lender becoming a bank-holding company.

Recovery Act Lifts Ceiling On Surety Bonds, Other Small Business Aid

Story from the Detroit Free Press

With tax incentives and steps to encourage lending, the American Recovery and Reinvestment Act recognizes that small businesses are part of the solution to getting our economy moving again. The bill's primary goals for the U.S. Small Business Administration are jump-starting job creation, re-starting lending and promoting small business investment.

The Act provides SBA with $730 million. This includes $375 million to temporarily eliminate loan fees and raise guarantee limits on some loans; extra funding for SBA-backed Microlenders; and $255 million to help viable small businesses with immediate economic hardship meet existing loan payments.

Small businesses that need surety bonds to compete for contracts also can qualify for SBA-backed surety bonds of up to $5 million, more than double the previous $2 million maximum.

Another element, which is already in place, is SBA's Microloan program. These non-profit, community-based lenders make loans of up to $35,000 to small businesses and start-ups. The act funds $50 million in new loans by Microlenders, plus $24 million to help pay for technical assistance and training from the lenders.

In addition, the Treasury Department will commit up to $15 billion in TARP funds to help unfreeze the small business lending market.

There are a lot of moving parts, but our aim is to put these programs in place as quickly as we can so they have the broadest effect possible.

End Game For GM Bondholders

As Originally Posted to the Wall Street Journal

The steps taken this weekend by the Obama Administration to reach a resolution for the troubles in the automotive industry increase the chances of a bankruptcy filing by General Motors or its rival, Chrysler.

For the moment, GM’s benchmark debt issue is valued at about 15 cents on the dollar, down a few cents from Friday, according to KDP Investment Advisors. The bondholders, according to published reports, have been asking for as much as 33 cents on the dollar as part of some kind of pre-packaged bankruptcy filing.

But such a recovery rate may be optimistic, analysts say. Earlier today, President Obama said that “it will require creditors to recognize that they cannot hold out for the prospect of endless government bailouts.” The administration’s actions this weekend were termed by Dan Alpert, managing director at Westwood Capital, as the removal of the “put to politics,” that is, the implied guarantee that the auto companies will continue to function, thus strengthening the bondholders’ position, much in the way Federal Reserve guarantees embolden risk-takers in a way they would not otherwise behave.

With that ballast removed, the expectations for recovery by the bondholders runs from about 15 to 20 cents, although it could be less. “The likely outcome is going to be more pain for all those involved, all direct and indirect stakeholders of General Motors,” says Sean Egan, co-head of ratings desk at Egan-Jones Ratings Co. “The equity they’ll receive will be nowhere near the face value of their debt.”

(Update: In a statement, the advisors to GM’s bondholder committee issue lukewarm support of the administration’s plans. They say that “all parties seem to agree that an out-of-court restructuring would be the preferred path to viability,” and that “bondholders are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity.” However, they note that “we have been very disappointed that the government and company have had virtually no real dialogue with bondholders while designing the proposed restructuring plan.”)

Shares of GM were down 21% on the New York Stock Exchange. The company’s outstanding senior debentures due in 2033 were traded above 90 cents on the dollar as late as October 2007 until falling sharply as the business floundered (see chart, below). Debtholders clearly understand the gravity of the situation — the company’s credit-default swaps, a measure of insurance against default bearing some resemblance to surety bonds, cost about $7.9 million upfront to insure $10 million in bonds for five years. The notional value — that is, the price of the underlying asset (the debt) insured by the CDS — of the outstanding credit default swaps is nearly $37 billion, according to Barclays Capital. GM has $45 billion in secured fixed debt.

Kip Penniman, automotive analyst at high-yield research firm KDP Investment Advisors, says that the likely outcome is a pre-packaged bankruptcy that is worked out in legal proceedings. “There has to be some enticement to get the bondholders to agree,” he says. “They do have leverage. They still have the legal obligation that GM owes them, and if they fail to honor that they will take them into bankruptcy.”

GM bond prices have declined sharply in the last few years. (Source: KDP Investment Advisors)