Apr 16, 2009
By Michael Aneiro, DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Amid the uncertainty about a possible General Motors Corp. (GM) bankruptcy filing, holders of bonds issued by GMAC Financial Services face some uncertainties as well.
Since GM in 2006 sold a 51% controlling stake in GMAC to an investor consortium led by private-equity firm Cerberus Capital Management LP, the two companies have led separate, but intertwined, lives. A GM bankruptcy could test the degree to which the two remain interconnected.
GM bonds and loans already trade at prices indicating investors expect a restructuring, but GMAC bonds are in significantly better shape. Nevertheless, given that GMAC can now count on government support and operates at a structural distance from GM, GMAC bonds appear to be languishing. GMAC's 7.75% notes due January 2010 trade at 79 cents on the dollar, according to MarketAxess, and its 6.875% notes due August 2012 trade at 58.5 cents.
GMAC had approximately $126 billion in debt outstanding at the end of last year. The good news is that GMAC creditors would likely avoid a direct initial impact from a GM bankruptcy and that GM creditors wouldn't have claims on GMAC assets.
"I don't think [GM creditors] could go after GMAC assets because they're pretty strongly ring-fenced," said Tom Ferguson, high-yield analyst at KDP Investment Advisors. "Given their ownership structure and the banking status and the separate filing status, I think they're quite independent in terms of a bankruptcy at a GM level."
After being dragged down by Residential Capital LLC, its mortgage unit, through the collapse of the housing bubble, GMAC's outlook has brightened in recent months. GMAC reduced its debt by $11.4 billion through an exchange offer and, as a bank, can receive government financial support.
But several factors are combining to weigh on GMAC bonds. Credit and equity investors alike have punished financial companies during the credit crisis. Meanwhile, the entire high-yield bond market now trades at an average of roughly 60 cents on the dollar, which limits upside potential for just about any credit. And despite qualifying for government aid, GMAC is still awaiting approval from the Federal Deposit Insurance Corp. to issue government-backed debt.
Furthermore, even with substantial government support, "GMAC faces a mountainous [debt] maturity profile over the next several years, and will likely require further support if traditional capital markets remain largely closed," wrote analysts at CreditSights in a note last week. Approximately $11.8 billion of its outstanding unsecured long-term debt matures in 2009, and $7.3 billion matures in 2010.
A GM bankruptcy may also trigger knock-on effects that could ultimately hurt GMAC and its creditors. For example, GMAC has provided temporary forbearance to GM dealers to help them weather the downturn in vehicle sales, but that could increase GMAC's risk.
"If...GM files for some form of bankruptcy protection, then exposure to dealer financing (historically a lowrisk business) may become a major concern for GMAC," wrote GimmeCredit bond analyst Kathleen Shanley in a research note this month.
A GM bankruptcy filing could ultimately benefit GMAC bondholders, according to KDP Investment Advisors' Ferguson, if GM emerges as a leaner, more profitable organization. In the meantime, GMAC bondholders must try to analyze the company's exposure on a variety of fronts.
"There's still a lot of risk due to the unique nature of GMAC," said Ferguson, who noted that the company's core issues are its need for liquidity and its ability to fund at a reasonable rate. "GMAC only has one customer, and if that customer goes bankrupt it certainly complicates things."
