Ask The Best and Brightest: GM's 8-K Filing on GMAC?
“Am I reading this right?” That’s the question posed by one of Our Best and Brightest regarding GM’s recent SEC filing [excerpted text after the jump]. The 8-K details the automaker’s purchase of GMAC shares. A purchase funded with your money (thanks to the Treasury Department). Here’s Uncommon Sense’s take:
1) GM is now the majority owner of GMAC
2) GM has to sell from over 50% to under 10% in 3 years — sounds like some cash
3) GM can’t try to influence GMAC until March of this year
My take: the more you monkey with a free market system, the worse it is for the consumer. Yours?
Entry into a Material Definitive Agreement, Financial Statements and Exhibits
ITEM 1.01 Entry into a Material Definitive Agreement
As previously disclosed, on December 29, 2008: (a) General Motors Corporation (“GM”) entered into a membership interest subscription agreement with GMAC LLC (“GMAC”) and FIM Holdings LLC, the other common equity owner of GMAC, under which GM agreed to purchase additional membership interests in GMAC (the “New GMAC Equity”), and (b) GM accepted a commitment letter (the “Commitment Letter”) from the United States Department of the Treasury (the “UST”) pursuant to which the UST committed to provide to GM a loan to fund GM’s purchase of the New GMAC Equity.
On January 16, 2009, and as contemplated by the Commitment Letter, GM entered into a loan and security agreement (the “Loan Agreement”) with the UST, pursuant to which GM borrowed $884 million from the UST and applied the proceeds of the loan to purchase the New GMAC Equity (the “Facility”).
As a result of GM’s purchase of the New GMAC Equity on January 16, 2009, GM’s common equity interest in GMAC increased from 49% to 59.86%.
The loan under the Facility (the “Loan”) is scheduled to mature on January 16, 2012 (unless the maturity date is accelerated as provided in the Loan Agreement). Except for the collateral securing the Facility (as described below), certain exchange rights the UST has with respect to the New GMAC Equity (as described below) and the absence of guarantors (as described below), the material terms of the Facility are substantially similar to the terms of the Loan and Security Agreement, dated as of December 31, 2008, by and between GM, as borrower, certain of its domestic subsidiaries, as guarantors, and the UST, as lender (the “December 31, 2008 Loan Agreement”)…
Collateral for the Loan consists of GM’s entire 59.86% common equity interest in GMAC, which includes the New GMAC Equity, and GM’s preferred membership interest in GMAC. This collateral was pledged pursuant to an Equity Pledge Agreement, dated as of January 16, 2009, made by GM’s wholly-owned subsidiaries, GM Finance Co. Holdings LLC and GM Preferred Finance Co. Holdings LLC, as pledgors, in favor of the UST (the “Equity Pledge Agreement”). The UST also has the right to exchange GM’s obligations in respect of the Loan for the New GMAC Equity, in satisfaction of GM’s obligations outstanding under the Loan at any time, on a pro rata basis. There are no guarantors of the Loan.
The proceeds of the Loan were used by GM to purchase the New GMAC Equity in furtherance of GMAC’s successful effort to become a bank holding company under the Bank Holding Company Act of 1956, as amended.
Pursuant to GM’s understanding with the UST and the commitments made by GM to the Federal Reserve, the New GMAC Equity will, prior to March 24, 2009, be placed into one or more trusts (the “Treasury Trust”) of which GM will be the beneficiary.
The UST will hold exclusive right to appoint the trustee of the Treasury Trust, who shall be independent of GM, and who will have authority to vote and dispose of the New GMAC Equity held in the Treasury Trust. Of GM’s remaining equity in GMAC, GM will hold 9.9% of such equity directly and any excess interest will, prior to March 24, 2009, be placed into a trust established by GM (the “GM Trust”) of which GM will be the beneficiary.
GM will appoint the trustee of the GM Trust, who shall be independent from GM, be approved by the Federal Reserve and who will have sole authority to vote and dispose of the GMAC equity contained in the GM Trust. GM has committed to the Federal Reserve that it will reduce its ownership interest (including interests as to which it is the beneficiary under the Treasury Trust and the GM Trust) in GMAC to less than 10% of the voting and total equity of GMAC by December 24, 2011.
In addition to GM’s commitment to reduce its ownership interest in GMAC, GM made a number of other commitments to the Federal Reserve that are similar to those previously relied upon by the Federal Reserve to ensure that a company could not exercise a controlling influence over a bank or bank holding company, including a commitment that GM will not, on or before March 24, 2009, have or seek to have any representation on the board of managers of GMAC, other than for one non-voting observer, and that GM’s veto rights under the GMAC LLC Agreement will be terminated. Based on GM’s commitments to the Federal Reserve, GM is not permitted to use its current ownership of 59.86% of GMAC’s common equity to exercise any controlling influence over GMAC, including the GMAC Board of Managers or the business activities of GMAC.”
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Here's what I've got, though I'm no expert. Sorry it's almost as long as the original writeup, but hopefully it's easier to read or digest: - The Treasury loaned GM $884M to buy a 10.86% interest in GMAC from Cerberus. GM's collateral for the loan is its preexisting 49% interest in GMAC. The loan comes due in three years and is meant to be paid back by selling off the majority of GM's interest in GMAC. - That 10.86% interest is to be put into a "Treasury Trust" with the Treasury appointing the trustee and GM as beneficiary. This means GM won't have any say in how that 10.86% interest is managed, or even when parts of it are sold off. If the Treasury feels so inclined, it can take direct possession (at any time) of the 10.86% interest instead of getting the $884M in cash back from GM. - 39.1% of GM's preexisting interest in GMAC is to be put into a "GM Trust" with GM appointing the trustee and GM as beneficiary. The trustee is supposed to be able to act independently, and can also decide how to manage or sell the interest. - GM retains direct control of 9.9% of its preexisting interest in GMAC. Basically, this is the piece of GMAC that GM will be left with three years from now, since the loan agreement requires that GM sell off its remaining ~50% interest in GMAC by Dec. 24, 2011. - Cerberus was paid $884M by GM (using the Treasury loan) for a 10.86% interest in GMAC, leaving Cerberus with a 40.14% interest in GMAC. To recap, here's who now (apparently) has an interest in GMAC: Cerberus - 40.1% GM Trust - 39.1% Treasury Trust - 10.86% GM - 9.9% - I believe the 10.86% interest in GMAC was put in a trust run by the Treasury so that the Treasury could at least make it look somewhat valid: they loaned the money, so they run the trust, even though GM carries the loan. There may be another reason more apparent to somebody that deals with these sorts of transactions on a regular basis. - Forcing GM to put 39.1% of its interest in GMAC into a trust appears to satisfy a Federal Reserve rule or policy to prohibit companies "exercis[ing] a controlling influence over a bank or bank holding company." By putting 39.1% in a trust, the trustee will have a say in the management of the new GMAC bank, but GM, a corporation, will not. - To correct point 3 in RF's writeup, GM is prohibited from exercising control until March 24, because that's the date by which the trusts will be formed. At that point GM will be unable to exercise control over GMAC since it will only directly control 9.9% of GMAC. Some things I don't know: - Is Cerberus being forced to put all or part of its 40.1% interest in GMAC into a trust as well, or otherwise being forced to sell off any of its interest over the next three years as part of this deal? - Would having a 40.1% interest allow Cerberus to "exercise a controlling influence?" I assume Cerberus was bought out of the majority position so that it would not be able to control GMAC. But if it can keep 40.1%, why would GM not be allowed to retain more of an interest in GMAC? - Why was $884 million paid for 10.86% of GMAC in its current state? If that's indeed an appropriate amount for that interest, that means that GMAC is currently worth $8.1B. Really? - I share lw's interest in what Cerberus is going to do with its new stash o' cash. Was this whole deal just meant to funnel even more taxpayer dollars to Cerberus? That's it on my end. Feel free to trash, expand, ignore, etc.
Just out of curiousity, is there anything to prevent Scartooth from simply taking on another psuedonym, and perhaps using another computer with a different I-P address to re-establish himself as a "contributor?" But then again, it sounds as if you can smell his prose a mile away.....and a leopard does have trouble changing his spots. Keep up the good work. Scarcely a day goes by that I don't check out your site once or twice!