Clock ticking at GMAC
GM says it will do what it needs to support its financing affiliate as a deadline for a big capital raise looms.
NEW YORK (Fortune) -- President Bush has thrown a lifeline to GM and Chrysler, but problems at their financing arms could throw a wrench into recovery plans.
Bush announced a $13.4 billion aid package Friday morning for GM (GM, Fortune 500) and Chrysler, saying that allowing the U.S. auto industry to collapse "is not a responsible course of action."
Although GM and Chrysler will now survive the holidays, their financing subsidiaries remain under immense pressure. GMAC and Chrysler Financial are struggling due to heavy debt loads and deteriorating credit market conditions.
GMAC's problems have been compounded by the fact that it was a top issuer of subprime mortgages before the housing bubble burst.
GMAC -- which, like Chrysler Financial, is controlled by private equity firm Cerberus Capital Management -- is trying to raise capital to become a bank holding company, which would enable it to enjoy the kind of federal financial support that GM and Chrysler are now in line to receive.
GMAC faces a Friday afternoon deadline that could determine whether it will be able to qualify for bank holding status. If it doesn't, the company has suggested GMAC could face a bankruptcy filing of its own.
Though GM no longer owns GMAC - it holds 49% of the finance company following a 2006 sale of the rest to Cerberus - a setback at GMAC would deepen the Detroit auto giant's financial troubles.
GMAC is the biggest lender to GM's 6,500 dealers nationwide. An analyst at Barclays Capital suggested in a report this week that GMAC's failure could force GM to come up with $9 billion to $13 billion in additional funding to back its dealers - money GM clearly doesn't have right now.
An analyst with fixed income research firm CreditSights said in a report last week that GM "remains significantly dependent on its former captive auto finance subsidiary."
GMAC has been trying for the past month to raise new funds by getting holders of $38 billion in its debt to swap their current bonds for a lesser amount of new bonds, cash and preferred shares. Those efforts have intensified in the past week.
The company has said it needs to get 75% of bondholders to sign onto the deal to raise enough money to qualify for federal funding under the Treasury's Troubled Asset Recovery Plan. The deadline for holders to tender their bonds is 5 p.m. Friday.
GMAC has said that failing to complete the swap by the end of the year "would have a near-term material adverse effect on GMAC's business, results of operations, and financial position."
So far, though, bondholders have been reluctant to take a haircut on their holdings, hoping that GMAC will sweeten its offer. Indeed, GMAC last week raised the offer after it found that less than a quarter of bondholders had tendered their shares into the offer.
The sweetener resulted in increased participation - 58% of GMAC bondholders had offered their bonds by the middle of this week - but the company remained far short of its 75% target.
GMAC's efforts suffered another blow Thursday, when The Wall Street Journal reported that big bond manager Pimco wasn't participating in the swap. Pimco didn't return a call seeking comment.
GM said Friday it will find a resolution to the GMAC problems. "GM is prepared to do what we need to do to support" GMAC, said General Motors operating chief Fritz Henderson at a press conference about the loan from the government.
Henderson declined to comment on the debt swap offering, but added that GM was in "constant dialogue with Treasury officials as well as the Fed."
"Stay tuned. We still have some work ahead of us to try to get it done," he said.
GMAC spokeswoman Gina Proia said the company was continuing "to discuss the options we've laid out previously," referring to the debt exchange plan and the company's efforts to become a bank holding company.
She didn't comment on the status of these efforts or Friday's auto rescue plan, but said GMAC was "encouraged" by the government's recognition of the importance of the auto industry to the U.S. economy.
The debt swap may not be GMAC's only hope. According to news reports Thursday, Cerberus was discussing a possible merger of GMAC and Chrysler Financial.
Cerberus wasn't immediately available to comment on these reports. But the private equity firm did say Friday it would use the first $2 billion of proceeds from Chrysler Financial to backstop the loan for Chrysler's automotive operations.
GMAC, meanwhile, said it would seek to swap some bonds in its Residential Capital mortgage unit for equity in the parent entity of GMAC Bank.
That move, said Tom Ferguson at KDP Asset Management in Montpelier, Vt., could help GMAC's bank holding company application by giving the company more capital.
He said GMAC has been "scrambling for ways to keep the application moving along," and wouldn't be surprised to see both GMAC and Cerberus take further action to keep the bank holding company plans from collapsing.
"The investment bankers are really earning their bonuses on this one," he said. 
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