Bond market puts heat on GMAC sale

Bond markets are showing signs of impatience with Rick Wagoner, the chief executive of General Motors.

The market welcomed his announcement last month that the company would sell a controlling stake in General Motors Acceptance Corporation, its profitable finance arm. GMAC’s bonds shot up to levels that implied it might get its investment grade credit rating back.

But in recent days, after trading almost independently of GM’s credit for a time, GMAC’s bonds have tracked lower. The cost of credit default swaps, a form of insurance against default, have tracked higher – in parallel with GM’s – before sharing in a modest recovery at the end of last week.

“Every day you don’t hear something, the markets get more and more itchy,” said David Hendler, an analyst at CreditSights. “A lot of market observers, especially rating agencies, have been giving GM . . . a lot of leash to try to concoct a deal to separate GMAC and [residential mortgage unit] ResCap from the woes of GM.”

The annual cost of five-year credit default swaps for GMAC exceeded 5 percentage points in early October, meaning it would have cost more than $500,000 a year to protect against default on $10m of the finance unit’s debt. That fell almost as low as $200,000 a year in the days after GM said it would sell a stake in GMAC, the lowest level since January. But it has since climbed again, more than doubling to $412,000 on Friday, according to data from Markit. GMAC continues to be seen as a better credit than GM itself.

GM has plenty of cash, and a quick sale may not be crucial to its immediate survival. But if Mr Wagoner can pull one off, it would bolster his credibility. And if no positive news emerges soon, the low investment-grade credit rating of ResCap could be at risk.

Standard & Poor’s reminded the market last week that a return to investment grade for GMAC and the preservation of ResCap’s rating – critical to maintaining a cost of funds that allows it to be competitive in the mortgage business – depend on the sale of a stake in GMAC.

GM is still exploring the sale of a stake in GMAC but any deal could take time, a company spokeswoman said.

Mr Hendler suggested several possible hurdles to an agreement, mot least that the number of buyers for such a large business is limited. Analysts estimate GMAC’s total value at more than $20bn.

Price could also be a sticking point, with GMAC’s key businesses – mortgages and car loans – both leaving periods of near-ideal market conditions behind. “The right time to sell was in 2003,” said Mr Hendler.