By Juan Lagorio and Dan Wilchins
NEW YORK (Reuters) - Auto and mortgage lender GMAC said on Wednesday that only a fraction of its bondholders agreed to swap their debt, raising doubts over the company's efforts to become a bank holding company and stay solvent.
GMAC, owned by private equity firm Cerberus
GMAC is looking to swap $38 billion of outstanding debt for a smaller amount of new debt, as well as preferred shares and cash, in an effort to reduce its debt load and raise the capital it needs to qualify as a bank.
The Detroit-based company already has a banking unit which offers certificates of deposit and online savings accounts, but becoming a bank holding company makes it eligible for government support including guarantees of new debt that it issues. The company could also apply for billions of dollars of capital under the United States' $700 billion Troubled Asset Relief Program.
But some bondholders believe the exchange forces them to give up too much. The new bonds will be guaranteed by subsidiaries of GMAC, but when GMAC is done restructuring, those subsidiaries may not have as much in the way of assets as they seem to now, said Chris Chaice, an analyst at independent research firm Covenant Review LLC.
"The guarantees for the new bonds are of suspect value," Chaice said. If GMAC tries a second debt exchange, it promised that any guarantees given to bondholders in the second round would also be given to bondholders that exchanged in the first round, which helps, Chaice added.
GMAC said that so far, investors holding about $6.3 billion of its debt, or about 22 percent of eligible bonds, have agreed to swap their securities. For the company's Residential Capital mortgage unit, holders of about $2.0 billion, or 21 percent, of outstanding notes have agreed. Investors can exchange debt later under less favorable terms.
Those amounts are well short of the 75 percent approval GMAC needs for the exchange to go through. A successful exchange would help GMAC raise the $30 billion of regulatory capital required for it to become a bank.
FIRST MOVER DISADVANTAGE
GMAC's difficulties exchanging debt come as the U.S. auto industry struggles. The U.S. House of Representatives looked at offering up to $14 billion of rescue loans to the major domestic automakers on Wednesday, but Senate Republicans threatened to slow or even block legislation.
GMAC said last month that without bank holding company status, it would likely have to sell assets and take other extraordinary measures to make good on its obligations.
Analysts said the company's survival is at stake. If the company does not become a bank, it risks violating the terms of its lending agreements, or covenants.
"If they don't get a waiver on those covenants, they probably don't have any alternative to filing for bankruptcy protection," said Sean Egan, managing director at ratings agency Egan-Jones Ratings Co.
GMAC will likely do everything it can to avoid bankruptcy, and bondholders are likely to hold out to get the best terms in a bond exchange, said Geoffrey Gwin, portfolio manager at investment management firm Group G Capital Partners. Meanwhile, if GM does not get government loans, bondholders will likely be reluctant to help GMAC.
"It's a fascinating multi-party game of chicken," Gwin said.
Gina Proia, a spokeswoman for GMAC, declined to comment.
GMAC's 5.85 percent notes due in January 2009 fell to 89 cents on the dollar, down from 94.125 cents on Tuesday, according to MarketAxess.
(Additional reporting by Dena Aubin, Jonathan Stempel, and Walden Siew; editing by Derek Caney, Matthew Lewis and Gunna Dickson)
