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With its 1Q08 tangible net worth compliance hurdle in the rear-view mirror, ResCap started talking this weekend with lenders about longer term liquidity solutions, two investors claiming knowledge of the matter and a loan trader told Debtwire. The discussions involve both credit facility and repo lenders, they said.
Those conversations intensified speculation that the company will pursue a large-scale discounted exchange offer for the unsecured debt coming due in June and November, said three buysiders and an analyst. “Such an exchange could potentially grant security to near-dated maturities as enticement to swap into a lower principal amount of longer-dated paper,” said the second buysider.
However, holders of the company’s USD 1.75bn unsecured term loan due in June may push ResCap to raise new capital to refinance them rather than agreeing to an extension and an amendment to the borrower’s minimum USD 5.4bn tangible net worth covenant, said the trader.
“[ResCap’s] banks are fatigued, I have serious doubt that they would be interested in an amendment at this point,” said the trader.
GMAC spokesperson Gina Proia declined to comment on any discussions with its lenders or a potential exchange, but reiterated the company is focused on prudently managing ResCap’s liquidity.
ResCap’s parent, GMAC, announced Friday (4 April) that it bought back USD 1.2bn principal amount of ResCap debt for USD 607m, or roughly 50% of face value. GMAC pledged the debt to ResCap to retire in exchange for USD 607m of preferred shares. GMAC also disclosed the purchase of USD 340m face value of ResCap debt at 78% of par, which it is currently holding.
GMAC launched the open market activity to bolster the mortgage lender’s tangible net worth calculation under its credit facilities, thereby avoiding covenant breach, said the first two investors claiming knowledge of the situation. ResCap has been relying on its parent for aid on the covenant since last year.
The USD 1.2bn of principal debt that GMAC bought corresponds with projected on-going write-downs on the company’s mortgage portfolio, making it likely that it was just enough to keep ResCap in compliance with its USD 5.4bn tangible net worth covenant in the JPMorgan-led credit facility, they said.
Proia declined to confirm that the open market purchases were necessary for the residential mortgage lender to remain in compliance with the USD 5.4bn tangible net worth covenant in its JPMorgan-led credit facility.
“[ResCap] specifically targeted open market purchases of its longer dated maturities to get the most bang for its buck from the net tangible net worth standpoint,” said the first investor claiming knowledge. “Up until now, the company had not seriously approached its banks or its repo lenders with a plan to lower the net worth figure and create a second structure for the repo lines.”
While the company has a USD 1.75bn term loan coming due in June, alongside USD 1.25bn of FRNs, it also has sizeable maturities on its repo lines in May and June, according to the first buysider. It is imperative that the company retain at least a portion of its access to those repo lines as it right-sizes its business model to conform to the new realities of the mortgage market, said the buysider.
ResCap does not break out the maturities and size of its specific repo credit lines, however the company’s repo lenders include Citigroup, Royal Bank of Scotland, Bank of America and JP Morgan, the buysider went on to say.
The mortgage lender’s 2008 debt maturities begin with a CAD 250m bond maturity due on 12 May, followed by a USD 1.75bn term loan and USD 1.2bn senior floating rate note both due in June. The company then has another USD 1.25bn of bond maturities due in November.
ResCap is rumored to be working with Goldman Sachs as a financial advisor in addition to previously-hired FTI Consulting, said two buysiders. Goldman’s investment grade credit research department temporarily suspended coverage of GMAC in recent days, said one of the buysiders. The investment bank halted coverage of National City last month before the announcement that it had been retained as a financial advisor to review strategic alternatives.
A Goldman spokesperson refuted the claim and said the bank still has active coverage on the credit. GMAC’s Proia declined to comment on rumors that ResCap is working with Goldman.
Since bottoming out at 68 on 17 March, ResCap’s FRNs due in June have traded back up to 90, according to MarketAxess. The notes gained over 11 points since 1 April. ResCap’s two November maturities have also been better bid since last week. The 8.125% notes due in November rose to 85.5 yesterday from 70 on 1 April, and well up from the 59 low they hit on 18 March.
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