New hope for GMAC to raise capital
GMAC says deal with debt holders has revived its efforts to raise capital it needs to become bank holding company, key to accessing Treasury and Fed dollars.
NEW YORK (CNNMoney.com) -- GMAC's hopes of being able to tap into much needed federal dollars got a lift after the financing company announced late Friday that it has reached an agreement in principal with the holders of a significant portion of its debt.
This is also good news for General Motors, even though it does not directly affect the automaker's own cash crisis and appeal for federal dollars. GMAC is 49%-owned by General Motors and 51%-owned by private equity firm Cerberus Capital Management.
GMAC extended an offer to holders of $38 billion of its current notes to swap them for a combination of new notes, preferred stock in the company and a limited amount of cash until 5 p.m. Tuesday. This was the second extension in the past week.
The issuance of the preferred stock would allow GMAC to reach the $30 billion in capital in needs to be approved as a bank holding company, which would enable GMAC to access money from the $700 billion bank bailout fund. It had only $9 billion in capital on hand at the end of the third quarter.
GMAC did not say how much closer it was to reaching the $30 billion capital level. It said the agreement "represents substantial progress" but that "significant additional participation will also be required" to meet the target.
As of Friday, only about $9.2 billion in old GMAC notes had been tendered to the company. But that was nearly $1 billion more than had been tendered before a warning from the company Wednesday morning.
If GMAC becomes a bank holding company, it would also be able to borrow money directly from the Federal Reserve.
Lack of ability to raise funds has severely cut into GMAC's ability to make car loans and mortgages. And the lack of car loans is worsening the plunge in car sales at GM (GM, Fortune 500). On Friday, GM announced it was essentially shutting down its North American assembly lines for the month of January due to weak demand for its vehicles and excess inventory.
A majority of GM's U.S. sales typically were financed by GMAC before the economy slowed down. But in November, less than 2% of its sales were financed through the unit.
GMAC is also the prime source of funds that most GM dealers use to fund its operations. If it can't get the capital it needs for bank status, it could cause widespread failures among GM's dealership network and cut even more deeply into sales.
GMAC, once a major source of profits for GM, reported a $2.5 billion loss in the third quarter, bringing its losses in the past five quarters to $7.9 billion. The financing firm has been hit hard by both the decline in auto sales and turmoil in the housing market. GMAC also is a mortgage lender.
The Bush administration announced Friday that it is considering using TARP money to directly help GM avoid bankruptcy. The nation's No. 1 automaker has warned it will fall below the minimum cash reserves it needs to operate by the end of the month without federal help. 
