Wednesday, September 12, 2007

Citigroup Grants $21 Billion in Funding to GMAC (Update3)

By Greg Bensinger and Jody Shenn

Sept. 11 (Bloomberg) -- GMAC LLC, the lender partly owned by General Motors Corp. that lost more than $1 billion on mortgages, will receive as much as $21.4 billion from Citigroup Inc. to fund auto and home loans.

The financing replaces a $10 billion arrangement dating from August 2006 with New York-based Citigroup, the biggest U.S. bank, according to a federal filing today. GMAC will get access to $14.4 billion and may be granted $7 billion more if certain conditions are met, according to the filing. The funds are for assets tied to U.S. automobiles, mortgages and other items.

``With the current global credit market, the company decided this funding was prudent,'' said Gina Proia, a spokeswoman for Detroit-based GMAC. ``This gives us additional liquidity. It bolsters our financial flexibility.''

GMAC's profit suffered this year as its Minneapolis-based unit, Residential Capital LLC, became entangled in the worst housing market in 16 years. Falling home prices, overdue payments by subprime borrowers and record foreclosures have hurt profit at U.S. home lenders, with more than 100 halting operations or seeking buyers since the start of 2006 as bankers curbed credit.

ResCap, as the unit is commonly known, reported losses of $1.15 billion in the past two quarters as subprime loans made to borrowers with low credit scores defaulted more than expected. It ranked as the ninth-largest U.S. mortgage lender in the first half of this year with $41 billion in new loans, according to industry newsletter Inside MBS & ABS.

Helping ResCap

GM sold a 50.1 percent stake in GMAC last year to a group led by Cerberus Capital Management LP that also included Citigroup. Detroit-based GM retains the rest. Michael S. Klein, co-head of Citigroup's investment banking and trading group, is a member of GMAC's board.

``We view today's disclosure as added evidence that GMAC is making an effort to provide funding support to its troubled mortgage operation,'' wrote Kathleen Shanley, a fixed-income analysts at Gimme Credit LLC in a report to clients.

Countrywide Financial Corp., the biggest U.S. mortgage company, was forced to tap $11.5 billion of emergency financing last month to avert a cash shortage. Bank of America Corp. stepped in with a $2 billion investment on Aug. 22 to help ease concern that Countrywide might file for bankruptcy.

``Enhancing financial flexibility in today's market is a prudent measure,'' said GM spokesman Randy Arickx. He declined further comment. Citigroup spokesman Dan Noonan declined to comment beyond GMAC's filing.

Higher Yields

Bond investors have demanded extra yield over government debt on GMAC and ResCap debt to compensate for the perceived higher risk of default.

GMAC's 6.625 percent note maturing in 2012 and rated BB+ by Standard & Poor's traded today at 87 cents on the dollar to yield 10.11 percent, or 6 percentage points over Treasuries, according to Trace, the price reporting service of the NASD. Rescap's 6.875 percent notes due in 2015 traded at 77.5 cents on the dollar today to yield 12.47 percent, according to Trace.

``It's really good for GMAC,'' said Thomas Flaherty, who owns GMAC's 8 percent bonds due in 2031 as part of the $25 billion he manages at Aberdeen Asset Management in Philadelphia. ``This is a very difficult environment, a very tough market.''

The new credit, which Citigroup may syndicate out to other lenders, has a one-year term, compared with a three-year term for the previous facility, Proia said. A majority of the funds are earmarked for car loans and related securities, Proia said.

Mortgage Writedowns

Cerberus, the New York-based hedge fund manager, is buying automaker Chrysler LLC. It paid $14.4 billion last year for a 51 percent stake in GMAC. GM later injected $1 billion of capital into GMAC to make up for writedowns of mortgage assets at ResCap.

``GMAC is focused on turning that business around,'' Proia said. ``We still view Rescap as part of our long-term business strategy.''

Cerberus owned a majority of another home lender, Aegis Mortgage Corp., which filed for bankruptcy last month. It also agreed to buy Option One, the subprime lending unit of H&R Block Inc. The latter has said the deal may fall apart unless Cerberus eases some terms of the deal.

ResCap was borrowing $12.3 billion as of June 30 through an affiliate that issues asset-backed commercial paper, according to a presentation on its Web site. Mortgage companies including Countrywide have said access to commercial-paper markets has been blocked amid a global credit shortage. Proia wouldn't say whether ResCap or GMAC was also blocked.

Outstanding asset-backed commercial paper shrank by $214 billion in the four weeks ended Sept. 5 to $959 billion, according to Federal Reserve data.

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