GMAC Transition Plan Cast In Doubt
Investors Refuse to Help Firm Tap Treasury Funds

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, December 11, 2008

Auto financing giant GMAC said yesterday that its investors were refusing to participate in a plan to save the company, darkening its prospects and increasing the strain on General Motors, whose dealers and customers rely on GMAC for loans.

GMAC, which has been forced to cover rising losses, wants to become a bank holding company so that it can tap funding sources including the Treasury Department's financial rescue program. But the company said in a securities filing that its investors are refusing to provide necessary financial support for the transformation, and that it will abandon the effort if the investors do not sign up by Friday.

Analysts said the company could be forced to file for bankruptcy protection if it cannot broker a compromise.

The consequences for car buyers, auto dealers and General Motors itself would be significant. GMAC, through September, still provided the financing for 80 percent of GM vehicles shipped to dealers and for 35 percent of GM vehicles purchased by customers. GM sold a 51 percent stake in GMAC to Cerberus in 2006.

GMAC already has slashed the availability of financing. In October, the company announced that it would offer financing only to customers with credit scores above 700 -- a benchmark that excludes about 42 percent of the adult population, according to Fair Isaac Corp., the developer of FICO scores. A bankruptcy filing would hasten the firm's retreat, crimping sales of Chevrolets, Buicks and other GM brands.

The troubles at GMAC and the financing arms of other automakers have contributed to an increase in interest rates on auto loans. The financing arms, which exist to help sell cars, have long forced banks to match their lower rates. But as financial troubles force the financing companies to pull back, banks are charging higher, more profitable rates.

"Consumers are going to pay more money," said Jack Fitzgerald, owner of Bethesda-based Fitzgerald Auto Malls. "Banks and credit unions are charging more because they know they can. Consumers were a lot better off when the captive finance companies came into being, but now people don't remember that anymore."

GMAC's problems began with the collapse of the housing market; one of its subsidiaries, Residential Capital, was one of the nation's largest mortgage companies. As the economy worsened, borrowers also started defaulting on car loans.

Like other financial companies, GMAC has been unable to find new investors to plug its losses.

Its problems have been compounded by the plight of GM, which is also flailing financially. The automaker is seeking emergency loans from the federal government, but the chances that it will secure those loans are uncertain. On Capitol Hill, Senate Republicans are moving to block a bill that would grant the funds.

In a bid for solid ground, GMAC said in November that it would seek federal permission to become a bank holding company. To qualify, the company needs to raise billions of dollars in capital, as banks are required to hold larger cushions of money than non-bank financial companies. Lacking options, GMAC set out to raise the money from existing investors, the holders of $38 billion in GMAC debt.

Under the proposal, investors would exchange their bonds for a combination of bonds and preferred shares in the company. The money GMAC received for the preferred shares would increase the company's store of capital, because unlike the bond money it does not need to be repaid.

As of yesterday, the company said holders of about a fifth of the debt had signed up-- far short of the 75 percent of the debt the company needs to exchange.

"The bondholders are holding out because they don't think they're being offered terms that are attractive enough," said Kathleen Shanley, an analyst with Gimme Credit, which specializes in the corporate debt market. "They figure they might be just as well off passing on this exchange" and hoping for a better payout if the company files for bankruptcy.

GMAC's problems already have forced dealers to start looking for new sources of financing. An October letter to the company from the California New Car Dealers Association protested that GMAC was forcing some of the group's 400 members into bankruptcy.

"At a time of their greatest need, our GM dealer members feel completely abandoned by GMAC's rogue actions," the letter said.

Meanwhile, GM yesterday announced a partnership with 1,300 credit unions in Michigan, Ohio, Indiana and Illinois. The credit unions will offer financing on GM vehicles at interest rates as much as 1.5 percentage points below the rates offered by banks. In exchange, GM will offer a discount of about 4.5 percent on vehicle prices.

The program will run through June, and could expand to include other states, according to David Adams, chief executive of the Michigan Credit Union League.

"There's a strong orientation around trying to help automakers and the industry," said Adams, noting that many credit unions in the four states were organized for employees of a particular automaker or supplier. "We have money to lend, and here's something good that we can do."

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