GMAC said Wednesday that it probably doesn’t have enough capital to become a bank holding company, putting the lender in an even more precarious position.
The auto loan and mortgage company, 51% owned by a group of investors led by private-equity firm Cerberus Capital Management, has been trying to persuade debt holders to exchange their investments for new equity stakes in the business.
If successful, the swap would boost GMAC’s capital enough for it to qualify as a bank holding company under Federal Reserve rules. This would give the firm potential access to government investments that other banks have received in recent months.
However, GMAC said Wednesday that investors holding less than a quarter of its outstanding debt have so far signed up for the exchange offer. The company needs roughly 75% participation for it to lift capital to the $30 billion minimum required.
GMAC has extended its offer to Friday at 5 p.m. Eastern time, but warned that if it doesn’t get enough investors to agree, the company will withdraw its application to become a bank.
That would “have a near-term material adverse effect on GMAC’s business, results of operations, and financial position,” the company said in a statement.
ResCap, a unit of GMAC that used to offer subprime mortgages, is in a similar predicament, it noted.
Further efforts at a debt-equity swap offer are unlikely, GMAC said.
“As a practical matter, GMAC does not believe it has the ability to make further changes to the GMAC and ResCap offers following the new deadline,” the lender said.
GMAC has “narrowing options,” according to Egan-Jones Ratings, a rating agency that’s paid by investors rather than issuers. “Deterioration in the mortgage and auto finance markets continues. Furthermore, increased scrutiny by the regulators is likely to impede new business efforts.”
General Motors Corp. (GM) , which still owns a big share in GMAC, can’t provide support, Egan-Jones said.
GMAC credit default swaps traded at 53% upfront Wednesday, up from 50% before the news, according to broker Phoenix Partners Group. The ResCap CDS traded at 67.5% upfront, versus 65% yesterday.
When contracts on credit default swaps trade upfront, it means investors seeking protection against a default must pay fees immediately. These contracts usually require only annual payments, but when concerns reach extreme levels, sellers of protection demand money upfront as well.
Upfront spreads on credit-default swaps of 53% mean that investors seeking protection on $100 million of debt for five years would need to pay $53 million upfront and $5 million a year.