High-yield/macroeconomics (fka YIELD)

[Preciouslife1]

GMAC Puts Individuals After Institutions in Bond Plan (Update1)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRTpnBYVITAM&refer=home
By Caroline Salas and Ari Levy

Dec. 1 (Bloomberg) ~~ GMAC LLC, the financing unit of General Motors Corp., is placing individual investors who loaned the company $14.6 billion behind institutions should the company file for bankruptcy.

Holders of so-called SmartNotes, which GMAC sold to individuals since 1996, aren’t included in the company’s $38 billion plan to exchange securities for new, discounted debt and preferred shares or cash, said Gina Proia, a spokeswoman for the Detroit-based company. SmartNotes investors “would be subordinated to the new notes, but they’re not being asked to take a principal discount,” she said.

SmartNotes show how perilous the bond market can be for private investors in times of financial stress.
Individuals continued buying the debt as recently as last year, even as the world’s biggest carmaker reported losses. GMAC lost $7.9 billion over the past five quarters, and October was its worst month for sales since 1945. Moody’s Investors Service cut the company’s credit rating to C on Nov. 20, the lowest ranking.

Retail holders “could get virtually nothing if the company files for bankruptcy,” said Kathleen Shanley, an analyst at Chicago research firm Gimme Credit LLC, who recommends investors sell GMAC debt. “If the exchange goes through, they would be subordinate. That would not be a good position to be in.”

GMAC issued $25 billion of SmartNotes in $1,000 denominations during the past decade, using the proceeds to help pay for day-to-day operations. The notes, introduced by Chicago- based LaSalle Bank, allow individuals to be paid interest on an annual, semi-annual, quarterly or monthly basis.
They include a “survivor’s option,” permitting spouses to sell the bonds back to the issuer if the owner dies.

‘Significant Risk’

The offer to swap unsecured notes held by institutions is part of GMAC’s plan to convert into a bank to gain access to the Treasury’s $700 billion rescue fund. The exchange is the second in five months for the company and its Residential Capital LLC mortgage unit, which have reported losses since mid-2007.

GMAC is seeking access to federal funds as a recession grips the U.S. economy. The government has provided more than $8.5 trillion in financing to unlock credit markets after almost $1 trillion in writedowns and credit losses at the world’s biggest banks and financial institutions.

If the debt swap isn’t completed by year-end, there is a “significant risk” GMAC will default, the company said in a Nov. 20 regulatory filing. Private equity firm Cerberus Capital Management LP in New York bought 51 percent of GMAC in November 2006. GM, also based in Detroit, owns the rest.

‘Out the Window’

The exchange is “limited to institutional notes and does not include retail debt instruments,” Proia, the spokeswoman, said in an interview last month. She declined to say why SmartNotes rank behind other debt.

The bonds already reflect investors’ concerns about getting repaid. GMAC’s 7.5 percent SmartNotes due in 2017 fell about 6.7 cents to 15.9 cents on the dollar on Nov. 20 after the exchange offer was announced, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The notes continued to decline at the beginning of last week, falling to 11 cents on the dollar to yield 70 percent by Nov. 25.

GMAC’s $4 billion of 8 percent senior unsecured debt maturing in 2031 are trading at 26 cents to yield 31 percent, Trace data show.

“If they’re going to offer one group the exchange, shouldn’t they offer it to all groups?” asked John Aronian, a 36-year-old private investor in North Salem, New York, who owns SmartNotes. “Or are they just going to throw one group out the window? The people that really need the most attention here are the retail buyers.”

Potential Benefit

Institutions are also being asked to accept losses. GMAC offered to buy back debt for as little as 55 cents on the dollar. Alternatively, holders can swap their securities for an equivalent amount of new senior guaranteed bonds with the same interest rate and maturity as their existing debt, and new 5 percent perpetual preferred stock.
Those owning the 2031 bonds will also get 8 percent subordinated notes due in 2018.

Holders of SmartNotes with shorter maturities may benefit if the exchange offer buys time for GMAC to repair its finances, because individual investors may get repaid at 100 cents on the dollar, according to Gimme Credit’s Shanley.

GMAC lost its investment-grade ratings in 2005 and its debt is now rated CC by Standard & Poor’s and C by Moody’s, 10 and 11 levels below investment grade.

Since the purchase of a stake by Cerberus group, credit markets froze, leaving GMAC unable to finance itself through bond sales. GMAC, Ford Motor Co. and Chrysler LLC were shut out of the public market for bonds backed by auto loans for the fifth straight month in October, adding pressure on the automakers to consider mergers and seek taxpayer funding.

Sales Slump

Sales of auto bonds slumped to $500 million in the month, compared with $9 billion in October 2007, according to Merrill Lynch & Co. data. The cost to sell the debt surged to record highs over benchmark rates on concern car owners won’t be able to make loan payments amid job losses, higher food and fuel costs and falling property values.

GM, pursuing about $12 billion in federal aid, said Nov. 7 that industrywide sales will be 11.7 million in the U.S. next year, down from a forecast of 14 million, and that its market share will be 21 percent. For GM, that would be 483,000 fewer vehicles sold on an annual basis than projected in July.

Congress has set a Dec. 2 deadline for GM, Dearborn, Michigan-based Ford and Chrysler LLC to present plans that prove they will be able to survive and pay back any federal loans.

‘Patently Unfair’

Subordinating the interests of retail investors is “patently unfair,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “Those notes never should have been placed in retail hands because the retail investors are totally unequipped to deal with the complexities of a weak and declining credit such as GMAC,” he said.

Companies typically ignore retail investors in a restructuring because they’re difficult to reach, Egan said.

While permitted under GMAC’s bond indentures, the exchange may result in lawsuits, said Andrew Stoltmann, a securities lawyer in Chicago at Stoltmann Law Offices, who has represented clients that lost money in GM-related securities.

“In this environment it’s going to be real problematic for the company even if they’re standing on solid legal grounds,” Stoltmann said. “It certainly looks bad.”

To contact the reporters on this story: Caroline Salas in New York at [e-mail]; Ari Levy in San Francisco at [e-mail]

Last Updated: December 1, 2008 06:44 EST