ResCap May Need A Little Help From Its Friends
May 23, 2008
A couple of weeks ago, I wrote a story about Residential Capital's bond redemption, which sources said bondholders had little choice but to approve. Now the company says it has enough support from bondholders to go ahead with the offer to exchange or buy back $14 billion in notes. But for that to happen, it still needs to secure a $3.5 billion senior-secured credit facility from parent GMAC.
And this is a bit tricky. Unless GMAC wants to provide $2.75 billion itself (parent companies General Motors and Cerberus Capital Management have agreed to pony up the first $750 million) the rest of the funding will have to come from somewhere.
GMAC has been tightlipped about where that might be, but it seems highly doubtful it would attempt a sale of ResCap debt to institutional investors. The distressed mortgage-finance company is teetering on the brink of bankruptcy, which was the reason for the bond redemption in the first place. The speculation is that by delaying bond maturities, ResCap is realistically only buying itself a few more years. And this doesn't present much motivation for your average institutional investor to jump on board.
Some sources speculate that GMAC might attempt a deal at the bank level. However, with the stress they've been under since the beginning of the credit crisis, the last thing most investment banks need is a couple of billion in ResCap debt.
Which leaves the old-fashioned route-relationships. Specifically relationships within the distressed debt world. Part hedge fund, part private-equity firm, Cerberus began more than 15 years ago as a distressed-debt shop, founded by Stephen Feinberg and William Richter. The firm is well-connected within the distressed space, even having former employees who've set up their own distressed funds.
"It will mostly get done through Cerberus relationships and maybe close relationships with GMAC," one banker told me.
ResCap has roughly $4.4 billion of long-term debt maturing in 2008-$1.2 billion in floating-rate notes due in June, $1.8 billion under a term loan due in July and another $1.1 billion in notes due in November. It also had, as of December 2007, roughly $15.6 billion of secured, short-term debt outstanding with various maturing dates in 2008.
The company has offered to tender $1.2 billion in floating-rate notes due June 9, as well as exchange another $12.8 billion in notes consisting of dollar-, euro- and sterling-denominated floating- and fixed-rate debt maturing from 2008 to 2015. The fixed-rate coupons range from 7.125% on 550 million euros due 2012 to 9.875% on £363 million due 2014. The offer to bondholders expires June 3.
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