STRESS TESTS: GMAC Faces Capital Drain
May 07 2009 - 1:15PM
Dow Jones News
GMAC LLC faces a difficult headwind as it seeks to bolster its
capital.
The auto lender will lose $2.75 billion through 2010, including
$1.49 billion this year, as it amortizes some of the gains stemming
from a debt restructuring last year.
This capital erosion likely played a role in the government's
determination that GMAC needs a hefty $11.5 billion in capital.
GMAC was one of the 19 banks put through stress tests by the
government; GMAC's need for $11.5 billion, a huge ammount relative
to the banks' $$21.85 billion in total equity on Dec. 31, was
reported by The Wall Street Journal, citing people familiar with
the matter.
These stress tests were undertaken to check the financial
soundness of the U.S.'s largest financial institutions in the event
economic conditions worsen.
Already, GMAC, a recent bank convert and the lender affiliated
with General Motors Corp. (GM), incurred a $267 million non-cash
expense in the first-quarter due to amortizing the gains from its
debt exchange. Regulatory filings indicate that GMAC, in total,
would incur $5.5 billion of such so-called non-cash interest
expenses related to its complex $38 billion debt overhaul in
November. This amount will be spread over the next several
years.
GMAC's need to amortize the gains will cost it precious capital
at a time when the lender has to fill its $11.5 billion hole. The
capital shortfall also comes in an environment where traditional
sources of funding remain elusive.
GMAC's non-cash interest expenses "could be one of the factors
in the government's evaluation of the company's capital position,"
said Mark Wasden, an analyst at Moody's Investors Service. "This is
one of multiple headwinds that GMAC faces from a capital
standpoint."
Wasden declined to comment on the outcome of GMAC's stress test
as the final results will only be released Thursday after the close
of trading.
To be sure, GMAC could get some relief as the U.S. government
has promised more funds to GMAC. GMAC received that assurance after
it last week assumed the mantle of lender for new financing to
Chrysler LLC's dealers and consumers while the auto maker
restructures in bankruptcy court. The size of these funds isn't yet
known.
GMAC is also in line to gain access to a federal program that
has allowed an array of financial institutions to raise financing
when they were otherwise shut out from repaying or refinancing debt
as a result of the credit crisis. More than four months after
turning itself into a bank, GMAC is still waiting for the green
light from the Federal Deposit Insurance Corp. to issue
FDIC-insured debt under the Temporary Liquidity Guarantee Program.
Under the program's guidelines, as time passes without such
approval, the amount of debt GMAC can raise decreases.
The $5.5 billion in non-cash interest expenses are aimed at
reversing a portion of the gains from the company's complex $38
billion debt restructuring in November.
A part of the gains from GMAC's debt overhaul came from GMAC
swapping its existing debt for debt that has a lower market value.
GMAC tacked this gain, along with broader gains associated with the
debt restructuring -- such as those fueled by reduced principal --
to its earnings.
Accounting rules require companies to reverse the nominal gain
related to the lower market value of the new debt over the life of
these new securities.
The bond exchange "was a key component of GMAC's capital raising
efforts and a critical step in receiving approval to become a bank
holding company," said Gina Proia, a GMAC spokeswoman.
The strapped lender turned itself into a bank in December in
efforts to garner federal funding. On the heels of its bank
registration, GMAC got $5 billion under the U.S. Treasury's
Troubled Asset Relief Program.
Companies typically offset non-cash interest expenses with new
earnings or by raising fresh capital.
But "capital markets are not conducive to raising capital for
firms such as GMAC and the company faces earnings headwinds," said
Wasden at Moody's.
GMAC reported a first-quarter loss of $675 million, widening
from a loss of $589 million a year earlier. Its results were aided
by a $631 million after-tax gain from retiring debt. Without this
gain, GMAC's loss totaled about $1.3 billion amid continued harsh
market conditions.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com