GMAC Needs to Clear Final Hurdle for Bailout Funds

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GRAND BLANC, Mich. – The financing arm of General Motors Corp. has until midnight Friday to clear a final hurdle in its quest to become a bank holding company, even though it already received the Federal Reserve's stamp of approval earlier this week.

GMAC Financial Services LLC must complete a complicated debt-for-equity exchange by 11:59 p.m. EST. The effort to raise $30 billion in equity from bondholders was helped along late Wednesday by the Fed's decision making the ailing auto and home loan provider eligible to access part of the government's $700 billion bank rescue fund.

GMAC wouldn't say Friday how close the company was to completing the exchange. Yet both actions — completion of the debt exchange and the Fed's acceptance of GMAC as a bank holding company — were tied to each other.

The Federal Reserve apparently needed to see that the bondholders were willing to inject more capital into GMAC, a critical requirement to get bank holding status. GMAC bondholders needed reassurance that the Fed would approve GMAC's application to qualify for federal aid.

"The success builds upon itself. The Fed vote sends a strong signal to the remaining bondholders to help them reach a deal," said Scott Talbott, a financial services lobbyist in Washington, D.C.

Shares of GM surged on Friday, the first day of trading since the Fed's announcement late Wednesday. Shares rose 41 cents, or nearly 13 percent, to $3.66.

The Fed's action Wednesday came as GMAC was still struggling to get bondholders to convert 75 percent of their debt into equity of the company. Analysts had speculated that without financial help, GMAC would have had to file for bankruptcy protection or shut down, dealing a serious blow to GM's own chances for survival. The Fed cited "emergency conditions" in justifying its decision.

GMAC's goal is to reach $30 billion in capital, the majority of which would come from the exchange of debt. Another part of the equity requirement included a demand from the Fed that $2 billion of the total come from new equity. So far, GMAC has received a commitment of $750 million from its parents GM and Cerberus Capital Management. It's unclear whether that funding would come from the bridge loans the U.S. Treasury granted GM and Chrysler LLC — which is owned by Cerberus_ earlier this month.

GMAC spokeswoman Gina Poria said she couldn't speculate on the precise "tipping point" that prompted the Fed to act on GMAC's application earlier than generally expected.

"We've kept the Fed and other regulators apprised of the bond exchange," she said Friday. "We still need to complete that bond exchange. It needs to be settled by the end of the year."

Becoming a bank holding company would qualify GMAC to access the government's bank rescue funds, and support GMAC loans to car buyers and GM dealerships.

GMAC has not said publicly how much it was requesting from the $700 billion bank bailout fund. CreditSights analyst Richard Hoffman estimated in a research note Friday that GMAC "could have applied for up to about $6.3 billion."

Sources close to the negotiations with bondholders said earlier this week that talks with GMAC were not going well, with creditors wanting more for their debt investments.

But Talbott said that any stubbornness among bondholders might have softened in recent weeks given the stakes.

"Anytime you ask investors to change their expectations and get less than anticipated, it causes strife," Talbott said. "But as the weeks wore on it became clear that without change the choice was getting very little in bankruptcy or accepting the changes in order to ensure the strength of GMAC to get the bulk of their investment back."

GMAC, which is 49-percent owned by GM, provides auto financing to GM customers and dealerships.

The Fed order says GM will reduce its stake to less than 10 percent of the voting and total equity interest of GMAC. GM's remaining equity interest in GMAC will be transferred to an independent government-accepted trustee who must dispose of the equity held in the trust within three years of the trust's creation.

Cerberus, which led an investment group that bought a 51-percent stake in GMAC from the automaker for $14 billion in 2006, will reduce its stake in GMAC to no more than 33 percent of the lender's total equity.

The Fed's move to provide government aid to one of the nation's biggest suppliers of auto loans was just the latest extension of the federal bailout program, initially designed to shore up ailing banks. As the credit crisis kept ballooning, the program expanded to include insurers, credit card companies, and the automakers themselves. Just last week, President George W. Bush ordered an emergency bailout of the industry, offering $17.4 billion in rescue loans, and citing imminent danger to the national economy.