The US Treasury committed $6 billion to support GMAC LLC, the financing arm of General Motors Corp, widening the government's effort to keep the largest US automaker out of bankruptcy.
The Treasury will purchase a $5 billion stake in GMAC and lend $1 billion to GM so the automaker can contribute to the lender's reorganisation as a bank holding company, according to a statement issued on Monday. The loan is in addition to $13.4 billion the Treasury agreed earlier this month to lend to GM and Chrysler LLC.
The fresh capital will enable GMAC to expand lending to car buyers and help save GM. The automaker's US sales plunged 22 per cent this year through November after GMAC ran short on cash and limited loans to people with only the best credit. The Treasury stepped in after Congress failed to pass an auto- industry bailout earlier this month.
“The relationship with GM is probably a key reason it's being bailed out,” said Thomas Atteberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles. “Philosophically, I'm not very happy about the fact that the government has to save an auto-finance company because management ran it into the ground.”
In a statement, GMAC said it “intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles.” The lender financed about 35 per cent of GM's retail customers last year.
“This is part of our strategy to position GMAC for long-term stability,” Toni Simonetti, a spokeswoman for GMAC, said about on Monday's Treasury announcement. “The reason we're doing this is so we can provide credit to consumers; we'll put these funds to use right away.”
GM's $1 billion loan from the Treasury would be used to support GMAC's rights offering. The loan may be completed by about January 16, the Treasury said.
GM stock has dropped 86 percent to $3.60 a share this year. The broader Standard & Poor's 500 Index has slumped 41 per cent in 2008 as the US sank into a recession that's now a year old.
The agreement opens a new rescue programme for the car industry as part of the Treasury's $700 billion Troubled Asset Relief Programme. The bailout was originally designed to buy troubled assets from banks and has instead become a fund for Treasury to prop up lenders, insurers, carmakers and now auto- finance companies.
The Bush administration has already agreed to loan GM $4 billion this month and $5.4 billion next month. If Congress agrees to approve funding of a second $350 billion for TARP, GM would get another $4 billion in February.
A Treasury official said there is no cap or deadline for aid for the auto industry under TARP. Congress “will need to release” the second half of the $700 billion under Treasury's rescue plan, the official said on condition of anonymity during a conference call with reporters.
The announcement left unresolved the status of GMAC's $38 billion debt swap. The lender said it has accepted all bonds tendered in the swap designed to reduce its debt load and help it qualify to convert to a bank.
The Federal Reserve last week approved GMAC's application to become a bank holding company. GMAC said on Monday that the Fed's approval didn't hinge on the debt swap.
“Once the offers are settled, which we expect to do promptly, results will be disclosed,” GMAC spokeswoman Gina Proia said in an e-mail.
GMAC will “continue to pursue” other ways to boost liquidity, including applying for an Federal Deposit Insurance Corp guaranty programme and attracting retail deposits from consumers, Simonetti said.
The failure of GMAC would leave GM at risk of losing many as 40 per cent of its 6,500 US dealerships, Martin Smith, a liaison to the lender as a member of GM's National Dealer Council, said December 10. The dealerships rely on GMAC to finance cars and trucks on their lots while they wait for consumers to buy them.
With GM selling cars at the slowest pace in 26 years and the country in its worst housing crisis since the Great Depression, GMAC and its Residential Capital LLC mortgage unit have no way to revive their own revenue and have been shut out of credit markets. GMAC has $540 million of bonds due this month and another $11.6 billion that mature in 2009.
GMAC's 5.625 per cent notes due in May 2009 jumped 24 cents in the past month and last traded on Monday at 92 cents to yield 29 percent, according to Trace, the Financial Industry Regulatory Authority's bond-pricing service.
GMAC, which had 26,700 employees as of December 31, 2007, had about $161 billion of unsecured and secured debt as of September 30, according to a filing last month. GMAC's $2.5 billion third- quarter deficit brought losses over the past five periods to $7.9 billion.
GM, which sold 51 per cent of GMAC in 2006 to a group led by private equity firm Cerberus Capital Management LP, is seeking a permanent federal bailout to avert bankruptcy. Cerberus also owns Chrysler, which it acquired last year.
