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ResCap, the residential lending arm of GMAC, is working with FTI Consulting on a plan to pledge assets to the company’s currently unsecured credit facility, two sources familiar and two buysiders told Debtwire. Management intends to use that security as a carrot to convince lenders to waive an anticipated breach of the credit agreement’s minimum net worth covenant, they said.
GMAC and FTI officials declined comment.
Addressing the tripped minimum net worth covenant is the first step in a long list of actions ResCap needs to take to meet scheduled maturities, said the analyst. While granting security to existing creditors will help ResCap extend its near term runway, the company has to get the investment community comfortable with its business plan going forward, said a second analyst. That unease is evident in the deeply discounted prices of Rescap bonds maturing this year.
The company’s existing JPMorgan led USD 875m 364-day unsecured revolver, USD 875m three-year unsecured revolver and USD 1.7bn unsecured term loan due in June contain a USD 5.4bn minimum tangible net worth covenant. ResCap reported a USD 6bn tangible net worth position as of 31 December 2007, helped by USD 2.7bn in capital contributions from its parent and the retirement of USD 1.7bn of debt in November and December at a discount.
However, continued pressure on the mortgage market means ResCap will likely trip the net worth covenant at the end of the 1Q08, said the sources. Through 4Q07, ResCap reported five consecutive quarterly losses totaling USD 4.5bn. Domestic loan production declined 62% year-over-year, while the company’s nonprime loan production fell to USD 100m from USD 6.8bn.
The company is working to secure the revolvers with a portion of its USD 11.9bn portfolio of mortgage-backed assets held for investment as opposed to those held for sale, said the sources. The bulk of the assets held for sale are conforming loans, according to an analyst.
ResCap’s three-year revolver was quoted recently at 65.167 down from 81.2 over the past two weeks, according to Markit. The term loan B was quoted at 74.786, down over 10 points over the past two weeks.
Assuming the loan amendment clears, ResCap must still pay USD 1.2bn FRNs due in June and USD 1.25bn of additional bond maturities due in November. The company faces an additional USD 2.7bn of unsecured debt maturing in 2009 and an additional USD 3.2bn in 2010.
The FRNs due in June moved up 1.75 points today to 71.25, but are still down 18 points over the past month, according to MarketAxess. The USD 750m 8.125% notes due in November traded today at 56.5. ResCap’s USD 750m FRNs due April 2009 traded today at 51.25, while the USD 2.49bn 8.375% notes due June 2010 traded at 46.75.
ResCap’s pull back in the non conforming mortgage market means it must now focus on originating lower margin conforming loans that can be sold to Fannie Mae and Freddie Mac. ResCap lacks access to vast deposit assets, leaving the unit at a decided long term disadvantage compared to other originators that fund loans from lower cost retail deposits, said the first analyst.
Earlier today, GMAC announced Alvaro de Molina will assume the CEO role at the parent company from Eric Feldstein on 1 April. Feldstein will join majority equity owner, Cerberus Capital Management, according to the company statement. de Molina comes from Bank of America where he served as CFO and was well regarded by investors for his transparency, said the second analyst.
“de Molina taking the helm brings a lot of confidence that GMAC is prepared to be very frank and answer some tough questions. That is important when the market is wondering if Cerberus and GM are confident in the business enough to support it,” said the second analyst.
(additional reporting by Adelene Lee in London)
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