GMAC Debt Deal Falls Short Of Goal

NEW YORK, Dec. 31 -- The financing arm of General Motors completed a complicated debt deal that fell short of the goal it set for the amount of fresh capital needed to help it ride out a historic collapse in auto sales.

The results of the debt exchange, announced Wednesday, came a week after the Federal Reserve approved GMAC Financial Services' application for bank holding status, making the company eligible for a portion of the $700 billion bank rescue package.

GMAC said bondholders owning $21.2 billion of its debt agreed to the exchange. A total of $17.5 billion, or 59 percent, of the GMAC notes were tendered, along with $3.7 billion, or 39 percent, of notes issued by Residential Capital, GMAC's home loan unit. GMAC had hoped for 75 percent participation on both offers.

GMAC spokeswoman Gina Proia said that GMAC is "pleased" with the results of the deal, which asked bondholders to swap debt for cash or securities. She said the deal's outcome does not change GMAC's new status as a bank.

However, Standard & Poor's on Wednesday cut certain debt ratings for both GMAC and ResCap to "selective default" after the deal was announced. It said the debt deal paid less than face value to some bondholders and devalued the bonds that hadn't been swapped.

S&P said the exchange, along with GMAC's new bank status, strengthened the troubled company. GMAC, which has been hit this year by the downturns in both the automotive and housing markets, posted losses totaling $5.59 billion for the first three quarters of 2008.

"We believe the exchange and the application for bank holding company status illustrate the gravity of the company's financial position," the agency said in a report.

Shares of GM fell 60 cents, or nearly 16 percent, to $3.20 on Wednesday.

Earlier this week, GMAC received a pledge of $5 billion in aid from the Treasury Department. In addition, the Treasury said it would lend up to $1 billion to GM so that the automaker would be able to buy more equity from GMAC. Those purchases are expected to raise more capital for GMAC.

In exchange for the funding, the government will receive GMAC preferred shares that pay an 8 percent dividend and warrants to buy additional shares, the Treasury said.

Analysts had speculated that GMAC, which provides financing for GM dealers and customers, as well as home mortgage loans, could have eventually failed if it hadn't received the federal aid.

GMAC provides 85 percent of loans that GM dealers use to stock car and truck inventory. If GMAC were to fail, those dealers would have a tough time getting financing from other sources.

A spokesman for Cerberus Capital Management, which bought a majority stake in GMAC in 2006, declined to comment on the deal Wednesday. A GM spokeswoman did not immediately return a call for comment.