Residential Capital said Tuesday that parent GMAC and private equity firm Cerberus Capital Management agreed to inject more than $1.4 billion in cash, a move that may help the struggling mortgage lender stay solvent.
According to a U.S. Securities and Exchange Commission filing, the money will come from asset sales and help ResCap plug a possible $2 billion cash shortage, more than triple the amount it estimated it needed a month ago.
ResCap on May 5 had estimated it needed to raise $600 million by June 30 to pay its debts. It said it now believes it might need the additional sum because "adverse" conditions left it unable to sell about $1.3 billion of assets.
Cerberus in 2006 led a group that paid General Motors$7.4 billion in cash for 51 percent of Detroit-based GMAC. GM owns the other 49 percent.
"There is still the potential for bankruptcy (at ResCap), especially if GM and Cerberus get more hesitant about providing capital," said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. "It is easier for them to buy assets, but for now they're giving ResCap more time, should the housing market or mortgage-backed securities market improve. Both markets now, however, are completely broken."
Like many mortgage rivals, Minneapolis-based ResCap has struggled with mounting delinquencies and falling volumes, and has essentially stopped making loans to people with poor credit.
The lender has lost $5.3 billion in the prior six quarters, and said in the filing that its liquidity problems could grow.
"There can be no assurance that ResCap's liquidity needs will not be greater or less than currently anticipated," the company said. "If liquidity needs are greater, ResCap may be unable to independently satisfy its near-term liquidity requirements."
ResCap and Cerberus were not immediately available for further comment. Fifth Third owns GMAC debt but not ResCap debt, Mikelic said.
According to the filing, Cerberus agreed to buy some ResCap assets for $225 million in cash plus a stake in a new company.
Cerberus also agreed to spend at least $950 million in cash to buy some mortgage-backed securities and mortgage loans, including some that are "non-performing," the filing shows.
GMAC, meanwhile, agreed to buy a ResCap business that finances vacation resorts for a little more than $300 million in cash, dependent on the business's book value and debts, the filing shows.
In addition, GMAC agreed to increase the size of a credit facility for ResCap to $1.2 billion from $750 million. ResCap said it expected to borrow $450 million on June 3.
ResCap was the eighth-largest U.S. mortgage lender in 2007, according to newsletter Inside Mortgage Finance. It is the nation's largest mortgage lender not owned by a major bank, other than Countrywide Financial, which agreed in January to be acquired by Bank of America.
ResCap's 8.5 percent notes maturing in 2013 traded on Monday at 43.6 cents on the dollar, yielding 32.16 percent, according to Trace, the Financial Industry Regulatory Authority bond pricing service. The level is considered "distressed."
GMAC's 8 percent bonds maturing in 2031 on Tuesday fell 0.38 cents on the dollar to 74.5 cents, yielding 11.07 percent, Trace said.