GMAC’s Bondholders Near Crucial Deadline

By Leslie Wayne|The New York Times

General Motors may have its lifeline from the federal government, but another crucial vote is looming that will affect its ability to provide car loans to customers.

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The vote is over the future of GMAC , its financial arm that is now awash in red ink. A decision on whether GMAC will continue to function — or, in the worst case, be forced into bankruptcy — may come as early as this weekend.

Holders of GMAC bonds are being asked to support a complicated transaction to reduce GMAC’s outstanding debt and allow it to become a bank holding company. This move would enable GMAC to issue more car loans by accessing low-cost money under the Treasury’s $700 billion financial plan. But it is unclear whether GMAC’s bondholders will go along with the program. To date, some important bondholders have balked. Meanwhile, GMAC has sweetened the offer and may even extend a Friday deadline for the bond-exchange deal.

One big bondholder, William H. Gross, said on Tuesday that his firm was unwilling to exchange its significant holdings of GMAC bonds, because the company was asking investors to forgive nearly half of what the company owed them.

In an interview, Mr. Gross said bondholders were being bullied into exchanging their bonds and he wanted Cerberus Capital Management, the private equity firm that owns 51 percent of GMAC, to put more money into the company.

“We wondered why GMAC was in such a desperate rush — they didn’t have any immediate financing needs, they didn’t have any issues that they had to repay,” said Mr. Gross, who is chief investment officer of the Pacific Investment Management Company, or Pimco.

“It wasn’t like General Motors, where they had a cash burn and were losing a billion dollars a month,” he added. “Yet, Cerberus said, ‘If you don’t do this by the end of the year, we are filing bankruptcy.’ It just didn’t sound right.”

It is unclear whether Pimco owns enough GMAC bonds to block the exchange offer on its own, but as the nation’s largest bond trading firm it is an influential player in the credit markets.

Other investors have been more supportive of the offer. David Bullock, a managing director of Advent Capital Management and a large GMAC bondholder, thinks that bondholders will eventually agree to the deal. If they do not he believes that G.M. will come up with a “Plan B” to allow GMAC, which was founded in 1919, to have enough regulatory capital to qualify as a bank holding company.

“One way or another, by hook or by crook, GMAC will become a bank holding company,” Mr. Bullock said. “It is too big to fail.”

Among the possibilities, according to Mr. Bullock, is that the government would allow the deal to go through with less than 75 percent of the bondholders agreeing or that some of the federal aid for G.M. would be used to increase GMAC’s preferred shares — or some combination of the two.

For G.M., and the many G.M. dealers that rely on GMAC to help finance the cars on the showroom floor, reviving GMAC could not come soon enough. GMAC has been nearly sidelined as its losses have mounted. Customers coming into G.M. dealerships who once relied on GMAC for loans are now being told that there is little, if any, money available for them. Dealers dependent on GMAC to finance their showroom inventory are worried that they, too, could soon be cut off.

At NeSmith Chevrolet-Buick-Pontiac-GMC near Savannah, Ga., customers have depended on GMAC for the last 35 years. But Martin NeSmith, the owner, said he turned away customers daily who were interested, but unable, to buy a G.M. product.

He estimates that he has lost about a quarter of his business since GMAC decided this year to lend only to customers with top credit ratings — credit scores over 700 — while cutting off all lending for car leases and used car purchases.

As recently as last year, GMAC provided the financing for half of all cars that G.M. sold in the United States. But that is now down to around 6 percent, according to the restructuring report that G.M. has submitted to Congress.

GMAC continues to provide inventory, or “floor plan,” loans to around 75 percent of the 6,450 G.M. dealers around the country — financing for the dealers to buy cars from G.M. for their showrooms. But, Mr. NeSmith, who is the G.M. national dealer liaison to GMAC, estimates that about half of GMAC-financed dealers could go out of business if current trends continue and inventory financing tightens.

“This is devastating,” Mr. NeSmith said. “We need to get the retail customers buying again.”

In the last two years, GMAC has lost $8 billion. For all the attention on car industry woes, most of GMAC’s losses have instead stemmed from an ill-fated investment in a subprime mortgage company, Residential Capital, many years ago.

Until recently, the auto loan business has been relatively healthy, generating steady returns. But, the billions of dollars GMAC has lost from subprime mortgages has impaired its overall financial health. For that reason, GM has been pressing hard on the bondholders and in Washington.

“Strategically, this is incredibly important,” said Thomas C. Ferguson, a debt analyst at KDP Investment Advisors in Montpelier, Vt. “GMAC is the vehicle that really allows GM to market cars. They need the help.”

Both GMAC and several ratings agencies have raised the possibility that if bondholders did not go along with the exchange program, GMAC might have to file for bankruptcy. Should that happen, it would scuttle the overall recovery plan of G.M. itself, a point that Rick Wagoner, chief executive of G.M., has made in Congress.

Vikas Bajaj contributed reporting from New York.

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