Thursday, December 11, 2008
GMAC Bondholders Balk at Debt Swap
By MICHAEL ANEIRO and APARAJITA SAHA-BUBNA GMAC LLC is facing opposition as it tries to persuade investors to swap bonds for lesser-valued debt. GMAC, the financing arm of General Motors Corp., said Wednesday that it has received only a fraction of the bonds it needs to exchange so it can reduce its debt level and raise the capital required to let it become a bank-holding company. It said it would extend the $38 billion swap-offer deadline until Friday, although there is speculation that it will be extended. To pressure bondholders, GMAC threatened to drop its bid to convert to a bank structure if it doesn't get the required support. Some bondholders said the plan doesn't ask enough sacrifice from GMAC's owners, an investor group led by Cerberus Capital Management LP and GM. GMAC Swap To lighten its debt load, the auto lender wants bondholders to swap debt for other securities worth less. Here is how it would work for one of its bond issues: BEFORE: The GMAC 8% notes due 2031 (face amount: $3.97 billion) are now trading at 26.5 cents on the dollar, according to MarketAxess. AFTER: Investors can exchange the old notes for new 8% senior guaranteed notes due 2031, with a par value of $800 of the old bonds' $1,000 principal. Plus, they may in the future get preferred stock valued at $200. This allows GMAC to save a fifth of its interest costs on the notes and boost its capital. Alternately, investors can elect to receive a $600 cash buyout per bond. IMPACT ON INVESTORS: Investors who opt for the bond swap lose $200 from $1,000 face value of the old bond but get more than the bond is worth in the secondary market and move higher in the line for repayment if there is a default. Some believe GMAC's threat is a negotiating tactic. Kathleen Shanley, an analyst at research firm Gimme Credit, said in a note Wednesday that in GMAC's statement "there is an implicit threat that the company will consider filing for bankruptcy." Bank-holding-company status "has been seen as GMAC's last best hope for survival," she said. GMAC bondholders aren't eager to receive common stock in a swap because they are leery about its value. They prefer new debt as it ranks higher in the capital structure in case of a bankruptcy filing. GMAC said it had gotten just 22% or less of existing debt securities from bondholders, who include debt investors in the company's mortgage subsidiary, Residential Capital LLC, or ResCap. The proposed debt restructuring is a critical part of the auto lender's efforts to become a bank-holding company, which will allow it access to federal funds. GMAC bonds fell Wednesday. Its 7.75% bonds maturing in 2010 declined to 55.5 cents on the dollar from 58.5 cents, according to the MarketAxess bond-trading platform. Under the exchange offer, investors may swap existing debt of GMAC and its mortgage unit for new debt with a lower face value, and preferred stock. Or they can opt for a cash payout valued at much less than the face value of the bonds they hold. GMAC has a low credit rating for a company that lends money, and has been shut out of the markets for raising funds. Without access to Federal Reserve lending facilities and to the market for Federal Deposit Insurance Corp. insured bank debt, GMAC will have to further scale back lending to shore up its balance sheet. This means that the financing arm will be further restricted in its ability to make auto and other consumer loans, deepening the sales erosion at GM. A lack of funds also means GMAC may have to pull the life-support plug on its mortgage unit. In the year to date, the seven completed exchange offers of distressed debt total $11 billion, which exceeds the entire amount swapped over the previous quarter-century ending in 2007, according to a study by New York University Prof. Ed Altman. "Distressed debt" is debt that trades at prices significantly below face value. View Full Image Associated Press GMAC has extended its $38 billion debt-exchange offer. More Heard on the Street: GMAC Holders Drive Hard BargainIf the GMAC exchange goes through, as well as two other pending deals from Realogy Corp. and Station Casinos Inc., the total this year would balloon to $44 billion in par value. Previously, the biggest debt-swap year had been 1999, with six deals valued at $2.1 billion. The offers to exchange bonds for lower-value instruments, known in Wall Street parlance as a "haircut," has provoked investor resistance beyond GMAC bondholders. Faced with a decision to accept significant losses in the hopes bond-issuing companies survive the credit squeeze, many bondholders said the offers seem tilted toward increasing value for equity holders and don't provide enough protection for debt investments. In GMAC's case, some bondholders said they want to see parent Cerberus inject more equity capital into the firm. "Investors are banding together strongly in some cases to oppose these exchanges," said Wes Sparks, head of U.S. fixed income at Schroders PLC. "The key thing is the issuer's ability to avert enough near-term debt maturities to get over the hurdle." At Station Casinos, two-thirds of affected creditors, representing $1.5 billion in debt maturing between 2012 and 2018, have formed a committee to fight the company's offer, to swap senior notes for new debt with a higher interest rate but at just over half the face value of the old bonds. The bonds trade between eight cents and 29 cents on the dollar, said MarketAxess. The committee called the offer deficient and proposed more discussions ahead of Thursday's exchange-offer deadline. A Station spokeswoman declined comment. Dissident bondholders at Realogy, owned by Apollo Management LP, filed a complaint in Delaware Chancery Court contending that the company's offer would constitute a breach of bond-contract terms. As part of the complaint, High River LP, a Realogy creditor owned by activist investor Carl Icahn, sued Realogy, calling the transaction a fraudulent transfer of assets benefiting Apollo, at bondholders' expense. It reasoned that the action delays debt repayment and pushes current bondholders lower in the payout order. Realogy, the parent of real estate brokers Century 21 and Coldwell Banker, in a regulatory filing said it believes the allegations in the complaint are without merit. Realogy last week said that it had received $237 million of commitments toward a $500 million offer to swap senior bonds maturing in 2014 and 2015, at between 36 cents and 50 cents on the dollar. Those bonds trade between 12 cents and 18.5 cents on the dollar. The deadline for the exchange is Dec. 18.