The US Treasury said yesterday that it would convert some of its existing preferred stock in GMAC into common equity, a move that will see the government’s ownership increase from 35% to 56.3%. Cerberus, the private equity firm, will be the next biggest shareholder with 14.9%. GMAC has been in talks with regulators and the Treasury for much of the year after abandoning hopes of filling the capital shortfall by raising equity privately.
The Treasury said it had previously budgeted $5.6billion for GMAC. The Obama administration has felt obliged to rescue the business because of its wider efforts to save the US automotive industry. GMAC provides finance to GM and has assumed the same role for Chrysler.
GMAC said after the capital infusion it does not expect to record more major losses from its mortgage lending unit, which should help stabilize results.
Residential Capital, the mortgage business whose bad debts have weighed down the company, would receive $2.7billion of new capital, the company said. Ally Bank, the banking subsidiary, has recognised a $1.3billion pre-tax charge related to mortgage assets and will receive $1.3billion in new cash.
“These decisive balance sheet actions and resulting capital infusions are intended to minimise the impact on GMAC and Ally Bank of any significant future losses related to ResCap’s legacy mortgage business,” said Michael Carpenter, a board member and former Citigroup executive, who took over from Alvaro de Molina as chief executive in November.
“By protecting the financial performance and strength of our core automotive finance operations, we expect to increase the pace at which we can fully repay the US taxpayer. These actions will also allow GMAC to pursue strategic alternatives for ResCap and the mortgage business.”
Many analysts see GMAC's mortgage assets, which make up about a third of the company's $178.2 billion balance sheet, as the main obstacle to the lender reaching profitability.
Those assets have already forced GMAC to seek new funds. Before Wednesday's capital infusion, GMAC had already received $12.5 billion of aid from the United States.
Questions still remain for GMAC, though. The extent of future losses from its mortgage assets is not yet clear, a bondholder said.
He added that the best route for GMAC to follow now would be to sell off GMAC's mortgage servicing business, which collects payments from borrowers and is worth more than $3 billion on the company's books.
The bondholder, who requested anonymity because he is not authorized to speak to the media, said the company could continue to make new home loans through its Ally Bank unit.
GMAC's remaining mortgage loans could be used to pay off coming debt obligations linked to its Residential Capital unit, the investor added. If the assets don't perform well enough, that unit could go into bankruptcy, he added.
GMAC said in its statement that its board of directors reviewed Residential Capital's options and decided unanimously to take the steps announced on Wednesday.
GM sold a 51% stake in GMAC to private equity firm Cerberus in 2006, but held onto 49% of the company. Over time, GM's stake has been whittled down to 16.6%, including a trust managed for GM's benefit. Cerberus' stake is now 14.9%. The U.S. now holds 56.3%, with the rest of the company being held by Cerberus investors.
The government previously held about 35% of the company's common stock.
GMAC's mortgage business lost nearly $600 million in the third quarter, but its auto finance operations were profitable, earning about $164 million after taxes.
On news reports of the planned capital infusion, the cost to insure GMAC's debt against default in the credit derivatives market fell to around 4.4 percentage points, or $440,000 a year for five years, from 4.66 percentage points at Tuesday's close, according to market data company Markit.
The UK arm of GMAC, known here as GMAC Financial Services, is quitting the British market, as it looks to sell off its lending book. One of it's subsidiaries, GMAC Commercial Finance, is the lender that helped to pull the plug on Woolworths when it collapsed last year.
GMAC Commercial Finance hit the headlines when, along with Burdale, the asset-based lending arm of Bank of Ireland, it lent £350million to Woolworths, in January 2008. The loan was secured against various of the retailer's assets, including its shares, and it's thought that both Burdale and GMAC managed to recoup nearly all of their cash despite the company's failure.
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