By on December 18, 2008

The Wall Street Journal (WSJ) reports that General Motor’s former captive finance unit and current chest-strapped TNT device looks set to miss its deadline for a debt-for-equity swap. GMAC needs to get the deal done to transform itself into a bank and score federal funding under the Troubled Asset Relief Plan (TARP). “GMAC needs to show $30 billion of capital in order to become a bank holding company regulated by the Federal Reserve… As of Wednesday, GMAC had received 58% of existing, eligible GMAC debt securities and 38% of outstanding debt securities of ResCap (as the mortgage unit is also known) — little changed from late Tuesday. Around 75% of the selected securities must be tendered for the proposed debt restructuring to succeed in raising capital that would go toward satisfying GMAC’s conditions to become a bank holding company.” Those plans took a major hit today…

Pacific Investment Management Co., a large bondholder of GMAC LLC debt, is unlikely to participate in the lender’s massive debt restructuring offer, said a person familiar with the matter.”

A WSJ source says if GMAC fails to reach its goals by close of play tomorrow, it might put its ailing mortgage unit, Residential Capital LLC, into bankruptcy. The move would be an attempt to cauterize the wound, so that GMAC could continue its auto financing and other operations. If that fails, and GMAC as a whole goes down, GM is through. Thousands of GM dealers would lose inventory financing and go belly-up, flooding the market with hundreds of thousands of unsellable vehicles.

This on the eve of the President’s decision on GM and Chrysler’s “managed bankruptcy” or similar. It’s going to be a busy not to say historic day…

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32 Comments on “Investor Reneges; GMAC Headed for C11. GM Next?...”


  • avatar
    Pch101

    This is a terrific example of the problem with the prepackaged bankruptcy concept as applied to GM or Chrysler.

    Major institutions such as PIMCO hold significant negotiation power. It’s quite possible that they have adopted this position in order to get better terms, including bucketloads of help from Uncle Sam to help revive their company’s interest.

    The federal government has expressed far too much interest in the outcome of these businesses to have much negotiating power, especially when they are up against well capitalized companies led by people who can outsmart the government. Since we have already publicly ruled out the idea of a “disorderly bankruptcy,” we have given great power to those who could make things awfully disorderly if they choose.

    The price is going up. Orderly = Expensive.

  • avatar
    folkdancer

    Why not?

    Why is Pacific Investment Management unlikely to swap their bonds for GMAC stock?

    Of course I understand that bonds get paid off before stock holders but in this case is there even anything left for bond holders if GMAC fails now?

    Swapping their bonds for stock would seem that bond holders may provide some relief (and the ability to get our tax money) for GMAC and maybe get more return eventually.

    The bond holders must feel that when the furniture is sold they will get more (or at least get something) now instead of waiting several more years for GMAC to disappear.

    Would appreciate insights from any of you who are accountants or lawyers.

    Before I had a chance to post these questions Pch 101 had one very good reason for the hold up.

  • avatar
    OldandSlow

    GMAC’s problem politically is two fold. It’s not too big to fail and names like PIMCO or Cerberus Capital don’t bring much sympathy to the taxpayer funded begger’s banquet from Main Street.

  • avatar
    folkdancer

    Why not?

    Why is Pacific Investment Management unlikely to swap their bonds for GMAC stock?

    Of course I understand that bonds get paid off before stock holders but in this case is there even anything left for bond holders if GMAC fails now?

    Swapping their bonds for stock would seem that bond holders may provide some relief (and the ability to get our tax money) for GMAC and maybe get more return eventually.

    The bond holders must feel that when the furniture is sold they will get more (or at least get something) now instead of waiting several more years for GMAC to disappear.

    Would appreciate insights from any of you who are accountants or lawyers.

  • avatar
    folkdancer

    TTAC – Please have your web site developer make it easier to make changes to posts without creating duplicate posts. Thank you.

  • avatar
    Pch101

    Swapping their bonds for stock would seem that bond holders may provide some relief (and the ability to get our tax money) for GMAC and maybe get more return eventually.

    No, it puts them at the back of the loan behind other lenders. In a bankruptcy, debt comes before equity. Swapping bonds for stock weakens their legal position, and gives them a security that is worth less money on the open market.

    The bond holders must feel that when the furniture is sold they will get more (or at least get something) now instead of waiting several more years for GMAC to disappear.

    Either that, or else PIMCO figures that they can raise the stakes, since the government is absolutely committed to keeping them afloat.

    PIMCO is either unconvinced or else is holding out for more. Since the taxpayer has a checkbook at the ready, don’t be surprised when more hands start coming out of the woodwork.

  • avatar
    PeteMoran

    The price is going up. Orderly = Expensive.

    You get the impression that The Bailout is taxi-ing down the runway, about to take off dollar wise!

    Pumping money into Detroit might seem like small beans if reporting of OB’s $850b stimulus is anywhere near correct. Outside the creative criminal gambler Banksters on Wall Street, you’d think it wasn’t possible to come up with enough ways to spend $850b.

  • avatar
    BostonTeaParty

    Just a thought that occured, could someone explain to me why would GMAC could drag GM into chapter 11 when Delphi didnt?

  • avatar
    PeteMoran

    @ BostonTeaParty

    As I understand it, dealers use a revolving GMAC facility to put vehicles into showrooms, GMAC pay GM on delivery and then the dealer pays GMAC when the vehicle is sold (or should that be IF they sell it).

    If dealers can’t finance vehicles into their “floorplan”, GM’s cashflow stops almost immediately.

    Happy to be corrected as I’m in Australia after-all.

  • avatar
    ellomdian

    1. Yes, GMAC is effectively the middle man in the transaction, giving GM the cash and getting paid by the dealer’s when the car actually sells.

    2. Why in the world would ANYONE trade Bonds for Stock in GM right now? You can’t short it, and it will likely zero out within the next 3-6 months, even if a bailout is approved.

    3. Delphi was a parts supplier. GM could eat the cost of “free” parts from Delphi for long enough to reorganize and find different suppliers. The number I saw was something like 800$ per new car sold at the time. GMAC is literally 90-100% of the cost of a new car “sold” out of the factory. If GMAC shutters, dealers will have to pay cash up front to get new cars, and will take on 100% of the liability of unsold merch. How many dealers do you know with enough quid to cover their existing inventory, let alone new models? The only good news is if they don’t tank immediately, they can pay out GMAC and stop paying what amounts to interest on the cars in the showroom. Honestly, in the long term – it’s better for the industry. But it will be HIDEOUSLY bad for the interim – expect to see dealers giving away cars cash on carry even more so than they are now – they either liquidate and pay off the remainder, or goodbye.

  • avatar
    Pch101

    As noted, GM needs to be able to provide financing for its dealers so that they can buy vehicles from the company. No financing = not many purchases by dealers.

    In addition, dealers need financing for customers, particularly for selling the glut of trucks and other undesirables. No cheap money = not as many sales for the dealers = not as many purchases by the dealers from the corporation.

    If we can figure this out, you can bet that PIMCO and every other major creditor and bondholder of GM and GMAC know all of this and more.

    Since the government is absolutely opposed to a “disorderly” bankruptcy, and since this failure could help to push GM over the edge, you can see now who is holding the cards. It isn’t GM or the federal government.

  • avatar
    rkeep820

    GMAC is still in business?

  • avatar
    crackers

    Perhaps this will finally stop GM from playing silly games with their delivery numbers. If dealers order what they think they can sell and pay what they can afford or what a bank will loan them, we will get a better idea of the real demand for GM product.

  • avatar
    Redbarchetta

    Thousands of GM dealers would lose inventory financing and go belly-up, flooding the market with hundreds of thousands of unsellable vehicles.

    If GMAC went belly-up and the dealers lost their financing what happens to the cars already on the lot? Do they have to send them back to the mother ship or pay cash upfront for them to GM to keep them? If they don’t have to pay up or return the cars I don’t see how this would kill the dealers instantly. The cars are just sitting there as it is now and practically not selling what difference does it make if they can finance more of them or not when they can’t sell the ones they have. Sure down the road this kills them but it might give them time to find alternative financing. Also if GMAC files Ch.11 doesn’t that mean they have to restructure not stop doing business and financing.

    Again what happens to the hundreds of thousands of GM cars sitting on lots if GMAC goes down?

  • avatar
    PeteMoran

    @ Redbarchetta

    Again what happens to the hundreds of thousands of GM cars sitting on lots if GMAC goes down?

    The dealer/GMAC contracts might have clauses that allow GMAC to demand full payment from dealers whenever they want. That would cause pain.

    Otherwise, cooler heads would prevail surely. It makes no sense to move all those vehicles anywhere else.

    In a Ch11 both the creditors and those that have credit from the Ch11 entity are negotiated with are they not? Or at least, the Ch11 Judge sets the orders for both?

  • avatar
    Redbarchetta

    Since the government is absolutely opposed to a “disorderly” bankruptcy, and since this failure could help to push GM over the edge, you can see now who is holding the cards. It isn’t GM or the federal government.

    Is the government that stupid to not notice that advertising stuff like that is going to make this even more of a tax burden, if we can see it those Harvard boys should be able to predict it.
    Don’t answer that I think I have an idea of how stupid the government is, they refuse to stop meddling and making things worse, EVERYWHERE.

  • avatar
    Pch101

    Again what happens to the hundreds of thousands of GM cars sitting on lots if GMAC goes down?

    If my understanding is correct, the sale between manufacturer and dealer occurs when the car is delivered to the dealer. So the dealer owns the car, but the car is financed by the credit company.

    If that is correct, a bankruptcy filing by GMAC should not eliminate the dealer’s obligation to repay the loan.

    Presumably, the court could repossess the vehicles if the loans are in default or are called. Dealers could be very tempted to default on inventory that has no realistic expectation of being sold for a price that is at least close to breakeven or better.

    The bigger problem would be GM’s inability to move inventory. Dealers cannot realistically expect to get very much independent floorplan financing, particularly on dogs that cannot be sold. Without floorplan, dealers just won’t buy very much inventory, if anything at all.

    Since most dealers use floorplan for most of their inventory, this is a big problem. No car company could expect to survive something like this unscathed.

    The government is in between a rock and a hard place. If they do nothing, the stock markets will take a huge hit, unemployment will leap and consumer confidence will drop. If they give them a bailout, the money will be pissed away. If they allow a “disorderly” bankruptcy, that’s as good as doing nothing. If they try to create a prepackaged bankruptcy, they have given tremendous power to the creditors to hold a gun to our heads, because every creditor knows how interested the government is in getting this to succeed, and after all of that, the prepack may still not be enough to fix the companies, anyway.

    We need to be realistic here. The best choice avaiable on the list is horrendous, and it only gets worse from there. There are no good options.

  • avatar
    AGR

    One of the reason that captive finance companies (GMAC being one example) floor plan dealers, in many instances the manufacturer can push additional product to the dealer and get paid by the captive finance.

    In the majority of floor plan covenants the dealer(borrower)must make curtaillement payments to the lender (captive finance) after specific periods of time. The idea is that the vehicle is floor planned for a finite time, after which the dealer starts paying down the vehicle.

    Its probably not surprising that many dealers have not made curtaillement payments on the floor planned inventory, with the captive finance not enforcing the covenants which facilitates the flow of new vehicles to dealers.

    One reason they are all shutting down production is to give breathing room to the entire wholesale financial system of floor planning to catch up with itself. Many dealers are probably not even in a position to pay their monthly floor planning charges, let alone curtaillement charges on top.

  • avatar
    nonce

    How much power does the federal government have on who gets what in bankruptcy?

    Could they, say, subtly lean on the bondholders and suggest that they really would not want to try things in bankruptcy court?

  • avatar
    John Horner

    Any current GM or GMAC debt holder would be a fool to trade debt for equity. It is highly likely that the equity holders are going to get zeroed out sometime over the next year. The debt holders are likely to get equity in The New GM at the time or will get some dimes on the dollar settlement if a liquidation happens.

    Meanwhile, ol’ George Bush says “I haven’t made up my mind yet” if and whether or not to step in. You have to wonder what new information he is waiting for in order to be able to get off the dime one way or the other. Somehow George W. Bush having his hand in the direction of an “orderly bankruptcy” process seems just a little hard to imagine. He hasn’t exactly covered himself in managerial glory, Harvard MBA or not.

  • avatar

    I can’t find any figures on it, but my impression is that in the 1960s, ordering a car was much more common. Dealers kept smaller inventories and I believe that the industry was closer to producing to market size. This is just my impression.

    What I do know is that after the two oil crises in the 1970s, first after the Yom Kippur war in ’73 and then following the seizing of the US embassy and hostages in Tehran in 1979, Detroit did have a lot of unsold vehicles sitting on lots. I don’t know if this was the first time this had happened, but I think that’s really when Detroit got into the vicious cycle of cash incentives to move the metal and keep the big line moving.

  • avatar
    ttilley

    @Ronnie: I think the “vicious cycle of cash incentives to move the metal” is separate from the question of ordering cars versus buying off lots (I’m inclined to agree with your timeline, but not with a causal connection).

    After all, Toyota and Honda didn’t have to put “cash on the hood” to move cars during the oil crises. And most people don’t order cars now…dealers trade cars when someone has a specific set of requirements.

    I’m thinking that people with specific requirements can, also, search inventory over the internet.

    Cash incentives are, really, a sign of mispricing.
    That’s understandable towards the end of a model year…less so towards the beginning. More understandable in the low thousands, less so in the high thousands or low ten-thousands.

  • avatar
    Usta Bee

    If the car companies stay in business after this mess the dealerships should be run with one demonstrator model of each car, and then if the customer wants to purchase that model his car is “made to order” from the factory like a Subway sandwich. That way dealerships would need less real estate to do their business, and they wouldn’t have their money tied up in unsold cars on the lot. If the customer has to wait a few weeks to get his car then so be it.

  • avatar
    PeteMoran

    @ Usta Bee and probably @ Ronnie Schreiber

    Every car I’ve ever bought I’ve had to wait for because I know what options I want to configure into my order.

    For such expensive items, it always amazed me that somehow cars turned into a sort of impulse buying game where you had to have the car in the lot to make the sale.

    Rather than letting a buyer leave the dealership, car salesmen resorted to discounts and offers to turn a potential back into a sale even on a vehicle that the customer might not have quite wanted. As Ford’s Mullay has said, dealer operations have become more about “The Deal” than the product and what the customer wants.

  • avatar
    nonce

    How come people haven’t gone after the dealers? They are very unpopular, everyone hates dealing with them, they are rich. It should be easy to get a PR campaign going to make sure they are crammed down more than the unions.

  • avatar
    Lichtronamo

    Here’s a tricky angle:

    Even if GMAC were able to reach the 75% threshold, the Bush Adminstration only has $15 Billion of TARP money left to allocate – some (most) of which GM and Chrysler want to get a hold of. Can GMAC hold out until more of the TARP money can be allocated (either by the new Congress on Jan 6 or by the new SecTres on Jan 20)?

  • avatar
    ttilley

    @PeteMoran: For such expensive items, it always amazed me that somehow cars turned into a sort of impulse buying game where you had to have the car in the lot to make the sale.

    When the Prius came out people around here (SF Bay Area) were signing up for waiting lists. The lists included selecting a prioritized list of possible colors…buyers weren’t even insisting upon a specific color. I know a few people who signed up and ended up buying on this basis.

    That didn’t equate into “cash on the hood”.

  • avatar
    PeteMoran

    @ ttilley

    I agree. Perhaps I should have targeted my comments toward “certain manufacturers the subject of much taxpayer interest in the USA at the moment”.

    Finished goods inventory management seems to be a particularly large problem for the Bigish3′s business model, and it isn’t a recent problem either.

  • avatar
    ttilley

    @PeteMoran: Right now, inventory management is a huge problem for everybody. Google ‘”long beach” AND cars’, for example…imported cars are stacking up at California ports.

    My point is that, beyond inventory management, is the question of what one chooses to build, that becomes inventory. I think that question has been a bigger problem for our Manufacturers Of Taxpayer Interest.

  • avatar
    nonce

    http://www.bloomberg.com/apps/news?pid=20601087&sid=aGHdHOHwvZWo

    GM, Chrysler May Get U.S. Loans to Survive to March

    By John Hughes and Robert Schmidt

    Dec. 19 (Bloomberg) — General Motors Corp. and Chrysler LLC would get U.S. loans to stay afloat until March under a Bush administration rescue plan that may be unveiled as soon as today, people familiar with the talks said.

  • avatar
    PeteMoran

    @ nonce

    Thanks for sharing.

    Back-door it through GMAC eh?

    The black hole maybe real. Hang on for a rough ride everybody.

  • avatar
    Pch101

    If the car companies stay in business after this mess the dealerships should be run with one demonstrator model of each car, and then if the customer wants to purchase that model his car is “made to order” from the factory like a Subway sandwich.

    That model will not work in the US, for a lot of reasons. The current business model works well here, but the domestics have too many dealerships for the dealers themselves to be profitable. The best dealers would be better off if they had less competition from fewer dealers.

    On another note, we’re now going to get to see how fragile the GM operation really is. They’ve been dumping inventory that can’t be sold into the dealerships in order to claim the revenue on their books. With that gimmick under threat, their financial picture is going to get much uglier very quickly.


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