GMAC May Face `Substantial Difficulty#39; Cerberus Says (Update1)
GMAC May Face `Substantial Difficulty,; Cerberus Says (Update1)
By Jason Kelly and Katherine Burton
Feb. 14 (Bloomberg) — GMAC LLC, the auto and mortgage
lender controlled by Cerberus Capital Management LP, may run
into “substantial difficulty;; if credit markets don;t improve,
said Stephen Feinberg, founder of the private-equity firm.
“We have detailed contingency plans in a continuing
worsening environment,;; Feinberg wrote in a Jan. 22 letter to
investors, a copy of which was obtained by Bloomberg News.
“However, if the credit markets continue to decline and we find
ourselves in a prolonged environment of capital market shutdown,
GMAC could run into substantial difficulty.;;
GMAC, the former financing arm of General Motors Corp.,
lost $2.3 billion last year as record U.S. home foreclosures led
to an increase in bad loans and auto-lending profit declined,
the Detroit-based company said Feb. 7. GMAC is in talks with
potential buyers about parts of its Residential Capital mortgage
unit, which posted a $4.3 billion loss.
“The good news is that we bought GMAC cheaply enough so
that even with all the bad news in the mortgage market and
credit markets, we still are in reasonable shape with our
overall investment,;; Feinberg, 47, wrote in the nine-page
letter.
The letter outlines worst-case scenarios for investors,
Cerberus partner Tim Price said in an interview today.
“The point of the letter was to underscore the risks in
the investment,;; Price said, referring to GMAC. “We don;t
expect everything we outlined to go wrong and we remain bullish
on the investment.;;
GMAC Gets Cash
Cerberus, based in New York, led a group of investors that
bought a 51 percent stake in GMAC from GM in 2006 for $7.4
billion. GM, which retained 49 percent, later injected $1
billion into GMAC to make up for earlier writedowns of mortgage
assets at ResCap. GMAC pumped another $1 billion into ResCap in
the third quarter of 2007 to help the lender meet minimum net
worth limits set by bankers.
“We;ve taken a lot of pretty aggressive actions to
restructure the business for longer-term improvement,;; GMAC
spokeswoman Gina Proia said in an interview today. “We;re
clearly focused on continuing to turn around our business.;;
The implosion of the subprime-mortgage market six months
ago, coupled with a slowing U.S. economy, sent investors fleeing
from all but the safest government bonds. Two rate cuts by the
Federal Reserve in January that lowered the benchmark fed funds
to 3 percent haven;t helped to bring investors back to the
corporate bond and loan markets.
Bonds Falter
GMAC;s $4 billion of 8 percent bonds due in 2031 fell 0.75
cent to 80.25 cents on the dollar today, according to Trace, the
bond-price reporting system of the Financial Industry Regulatory
Authority. The debt yields 10.2 percent, or 559 basis points
more than similar-maturity Treasuries, Trace data show. The
notes traded at 83 cents and a yield of 9.9 percent in December.
ResCap;s $2.49 billion of 6.375 percent debt due in 2010
fell 0.8 cent to 64.2 cents, yielding 30.1 percent or 2,817
basis points more than Treasuries, according to Trace. A basis
point is 0.01 percentage point.
Credit-default swaps tied to GMAC;s bonds rose 18 basis
points to 895 basis points, the biggest increase in a week,
according to CMA Datavision. The contracts, used to speculate on
the company;s ability to repay its debt or to hedge against
losses, rise when investor sentiment worsens. They reached a
record 942 basis points last month, CMA prices show.
Feinberg also discussed firm;s acquisition of Chrysler LLC.
“They;re ahead of everything we expected,;; Price said.
“We;re a long-term investor and it;s certainly on track to be a
success.;;
Economic Concern
The Auburn Hills, Michigan-based automaker, which Cerberus
bought last year, has more than $8 billion of cash, and is
beating its initial earnings estimates, according to the letter.
“Even though we bought the company with a lot of cushion,
the investment is by no means without significant risks.;;
The U.S. economy faces a possible recession, Feinberg
wrote, citing falling housing prices, the rising cost of energy
and declining consumer confidence.
“It is in the case of an extraordinary automotive collapse
or an unusually deep recession that we worry,;; Feinberg wrote,
noting that a collapse in the auto-finance market would hurt
Chrysler finance unit by making it difficult to borrow money to
make car loans.
The letter describes Cerberus;s investment philosophy and
the firm;s outlook on the market, including the impact of
writedowns at banks including Citigroup Inc. and Morgan Stanley,
losses at bond insurers including Ambac Financial Group Inc.,
and the housing crisis.
United Rentals
In November, Cerberus backed out of a $4 billion agreement
to buy United Rentals Inc., the U.S.;s largest construction-
equipment rental company, because deteriorating credit markets
would make it hard for United Rentals to borrow money after the
acquisition was completed.
“Walking away from the transaction was very difficult for
us because we knew we would get criticized and there would be
significant reputational fallout,;; Feinberg wrote in the
letter. “Nevertheless, our responsibility and obligation are to
our investors, and we will always protect you, even if we have
to take a lot of grief in the process.;;
Feinberg stressed that Cerberus spreads its funds,
including the current Series Four, across a number of
investments.
“If any one, two or even three deals fail, however, our
people will feel awful and will find it unacceptable, but it
will not hurt the funds terribly,;; he wrote. “Because Series
Four is very diversified, its overall success does not depend on
the future of GMAC, Chrysler or any other single investment.;;
To contact the reporters on this story:
Jason Kelly in New York at
