GMAC Bonds

History

GMAC was formerly known as General Motors Acceptance Corporation when it was under General Motors. It was founded in 1919 in Detroit, Michigan. Now it is known as GMAC financial services. They are a financial services firm with establishments in around 40 different countries. GMAC provides financial services including insurance, mortgages (Residential Capital LLC.) and automotive finance.

Current News

GMAC bonds have been reducing in value lately. This is mostly due to Residential Capital LLC. (ResCap), a subsidiary of GMAC, loss of $859 million through investment securities relating to mortgages. As well as that, changes in many mortgage loans value. This resulted in the recent (May, 2008), reduction of their credit rating by Moody’s Investors Services.

As well as that, ResCap’s credit rating has also been reduced from B2 to B3. The reduction in credit rating for ResCap’s was due to the company not being able to show that it can acquire enough money to cover its debt. As well as that, because of the many risky business dealings ResCap has taken part in when it comes to residential mortgage loans.

ResCap have been trying to turn around their finances by going through a $60 billion refinancing. This refinancing had also increased their operating expenses because it had caused them to restructure the company. As well as that, the refinancing conflicted with ResCap’s long-term potential to earn. Hence, their credit rating was reduced. As well as that, their credit rating has been predicted to reduce even more from B3 in the next twelve to eighteen months.

Their $60 billion refinancing involved creating new bank credit lines and switching their debt with new bonds. These bonds however, had later maturities. Another form of refinancing included acquiring new forms of capital. This means, GMAC seeking new companies to invest in the company. This would allow GMAC to use this new capital to earn more in the long run. As well as that, ResCap has a high amount of maturities in 2010. This includes unsecured bonds of $1.8 billion and secured bonds of $1.7 billion. However, even with the refinancing and the maturities on bonds, the outlook for and ResCap is not good.

GMAC has decided to help ResCap financially. However, since the end of March, ResCap’s equity has declined to $5.8 billion. This has had a negative effect on the company. As well as that, since GMAC decision to help ResCap their cash flow has reduced by $4 billion. Due to this decrease in money, it is unsure how long investors and shareholders will continue to help GMAC in the long run. Hence, if GMAC wishes to further help ResCap, it can potentially reduce GMAC financial standing in the business community. GMAC’s credit rating has already been reduced from B2 to B3.

Thus, the above mentioned events, has had a negative effect on GMAC bonds. It has reduced their value and its unsure if GMAC will be able to pay the bond at its maturity dates.

The following article has explained the history of GMAC. As well as that, the current events relating to GMAC and its subsidiary ResCap. The effect of the current events on GMAC bonds have been highlighted as well.

http://www.r-i.co.jp/eng/news_topics/detail/200804/e08-c-362.pdf
http://www.reuters.com/article/bondsNews/idUSN1628151020080616
http://www.bloomberg.com
http://www.gmacfs.com/