On Wednesday, 31st December 2008, GMAC Financial Services declared that bondholders who represent $21.2 billion of the amount owed by the firm had accepted the conditions of a debt-for-equity swap that was projected to assist it in raising adequate capital in order to become eligible for federal aid.
GMAC offers loans to customers and automobile dealers and is partly owned by General Motors and also by Cerberus, the parent company of Chrysler motors.
The outcomes of the swap bid come a week later than the Federal Reserve’s sanctioning of the application from GMAC for bank holding company status, making it qualified for a part of the $700 billion bank rehabilitation package. According to GMAC spokesperson Gina Proia, the results are satisfactory. The swap supported the capital raising endeavor of GMAC substantially.
GMAC stated that bondholders bade 39% or $3.7 billion of its Residential Capital notes and 59% or $17.5 billion of its GMAC notes. The firm had targeted for 75% contribution for both bids.
On Wednesday, the credit rating services of Standard & Poor’s slashed particular debt ratings for both ResCap and GMAC to “selective default”, following the announcement of the deal. It alleged that some bondholders received lower amounts than the face value of the bonds from the contract and there was a devaluation of those bonds which had not been exchanged.
Standard & Poor’s stated that the swap in conjunction with the new bank status of GMAC has fortified the distressed firm. GMAC, which has been affected by the slumps in both the real estate and automobile markets, suffered losses amounting to $5.59 billion for the first three quarters of 2008. GMAC, the financing division of General Motors, obtained $5 billion from the United States Treasury Department in the form of aid this week. Moreover, the Treasury Department stated that it would provide up to $1 billion to General Motors as loan in order to ensure that the automobile manufacturer is able to purchase higher equity from GMAC. These buys are likely to raise higher amount of capital for GMAC.
The contribution in the debt swaps failed to meet the point that was required by GMAC to satisfy its capital target of $30 billion, as stated by the firm in the past. GMAC had mentioned it required $30 billion in regulatory capital so that the Federal Reserve acknowledges its request for becoming a bank holding company.