A GMAC failure could doom GM dealers

[DainBramaged]

Even if General Motors gets a bailout in Washington, its troubled captive finance company faces a failure that could trigger thousands of dealership bankruptcies.

GMAC Financial Services faces several critical deadlines this month to refinance $38 billion in debt, qualify for a federal bailout and avert bankruptcy. Late last week, its prospects of meeting those deadlines appeared bleak.
If the lender goes under, as many as half of GM's 6,450 U.S. dealerships could be forced to close because they could not finance inventory, predicts Martin NeSmith, a GM dealer near Savannah, Ga.

"Some might be able to get financing," says NeSmith, who is GM national dealer council liaison to GMAC. "But a lot of them won't."

GMAC spokeswoman Sue Mallino declined to speculate on a potential bankruptcy or its effects on dealers. GM did not respond to a request for comment.


Cerberus Capital Management LP, the parent company of Chrysler LLC, bought 51 percent of GMAC from GM in 2006. GM retains a 49 percent interest.

Cerberus also owns Chrysler Financial, which like GMAC wants to convert itself to a bank holding company. That change would allow the captives to qualify for funding from the $700 billion federal rescue package for the financial industry.

To become a bank holding company, GMAC must meet a minimum standard for capital defined by the Treasury Department, which administers the rescue fund.

To raise the money and enhance its liquidity, GMAC seeks to persuade bondholders to exchange $38 billion in existing bonds for new debt.

For the debt swap deal to go through, GMAC says it needs bondholders representing at least 75 percent of the $38 billion — about $28.5 billion — to take part. Last week, though, GMAC conceded it had met just $8.3 billion of that goal.

GMAC takes a big step toward bankruptcy if the deal fails, says the Wall Street financial ratings agency Standard & Poor's. "If the company fails to convert to a bank holding company, we believe the potential for a bankruptcy filing would be high," Standard and Poor's analyst John Bartko wrote in note Thursday, Dec. 11.

In a statement last week, GMAC said it would withdraw its application to become a bank holding company if the swap fails.

Standard & Poor's says GMAC is offering bondholders less than face value for the old bonds. If GMAC files for Chapter 11 bankruptcy, bondholders might be paid even less.

Even if the debt swap succeeds, the clock continues to tick on existing GMAC debt. About $1.8 billion of unsecured debt matures by year end. Another $12.8 billion is scheduled to mature next year and $8.8 billion in 2010.

That debt level could trigger another crisis for GMAC. The company has told the Securities and Exchange Commission it could be in default of its credit facilities if the ratio of its borrowed funds to its net worth exceeds 11 to 1.

That's liable to happen if GMAC doesn't complete its debt-swap offer by Dec. 31, the company says. A default could enable creditors to demand immediate payment.

As recently as Sept. 30, GMAC provided dealership inventory financing for 80 percent of GM vehicles worldwide. Two months ago, an unscientific Automotive News survey of U.S. GM dealers found that four-fifths floorplanned with GMAC. Of those dealers, half said they were looking for new inventory lenders.

In addition to dealer inventory financing, GMAC remains a major source of retail financing. Through Sept. 30, the company says it financed 42 percent of combined loan and lease volume for GM's North American dealers.

But GMAC's loan and lease penetration rates have dropped sharply in recent months. The company has virtually stopped writing vehicle leases in the United States and is making loans only to customers with the best credit ratings.

In the restructuring report GM filed with Congress this month, the company said that in 2007, GMAC financed nearly half of GM retail sales. Today, GM said, the figure is 6 percent.


http://www.autonews.com/article/20081215/ANA06/812150362/1142 (subscription only, posted in full)