Sunday, December 28, 2008
GMAC's Bonds Get a Bank Boost
--GMAC got the nod from Fed to become a bank-holding company --Its bonds, especially short term, gained significantly. Long term bond and CDS remained in distressed level --Fed's move complement its support financial auto markers By ANUSHA SHRIVAASTAVA and ROMY VARGHESE GMAC's bonds gained Friday, buoyed by the Federal Reserve's Christmas Eve approval of the auto-financing company's application to become a bank-holding company. GMAC got the nod even as the result of the lender's capital-raising plans, a key element in its transformation to a bank, remains uncertain. GMAC has extended the deadline several times for the note exchange and cash tender offers aimed at restructuring $38 billion in debt. The offers were due to expire Friday at 11:59 p.m. Eastern time. Gains in GMAC bonds were focused mainly on the short end, while longer-dated bonds and credit-protection costs, though improved, remain in distressed territory. That is a sign that, even with government backing, investors are still cautious on the lender's longer-term outlook. The Fed moves also complement support for the U.S. auto makers, with GMAC the primary source of loans for buyers of GM cars. "Why bail out the auto makers if you're going to let the biggest source of lending go under?" said Carl Kaufman, portfolio manager of the Osterweis Strategic Income Fund in San Francisco. Becoming a bank-holding company "certainly takes the pressure off them," Mr. Kaufman said of GMAC. But, "we still haven't answered all the questions." GMAC's 5.625% notes due May 15, 2009, were quoted at 94 cents on the dollar, 27 cents better on the day Friday, on seven trades, according to MarketAxess, an online trading platform. The only active issue on the long end, an 8% note due November 2031, jumped 15.25 cents to 44 cents. Investors' pessimism is also seen in GMAC's credit-default swaps. On Friday, the cost of protecting $10 million of GMAC debt for five years was at $2.55 million in up-front payments and a $500,000 annual premium. On Wednesday, ahead of the Fed's approval, investors had to pay about $4.3 million in upfront fees on top of the $500,000 annual premium. The swaps levels also reflect the challenges facing GMAC, owned by General Motors Corp. and private-equity group Cerberus Capital Management, even though it now has access to stable funding sources. As a bank-holding company, GMAC is eligible for government money under the Treasury's Troubled Asset Relief Program and can borrow short-term funds at the Federal Reserve's discount window, where the rate currently stands at 0.5%. The Fed's actions take some of the pressure of the debt exchange, which had struggled to attract sufficient investor interest. "With the primary regulator on board, the capital-raise machinations seem almost a moot point," wrote CreditSights analysts in a note. The Fed has set conditions in its approval of the bank status, such as restricting the stakes of GM and Cerberus and preventing any investor from controlling 5% or more of the voting shares or 7.5% of the total equity of GMAC. "Becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and businesses, including auto dealers," GMAC spokeswoman Gina Proia said late Wednesday. "As a bank-holding company, GMAC will be competitively positioned to serve our customers by having improved access to funding."