Capital Markets

$60B Lifeline for Ailing Mortgage Lender

A loss-plagued mortgage lender is being propped up by new bank facilities and new commitments from owners GMAC and Cerberus Capital Management.

Staving off a potential bankruptcy of its troubled home-mortgage lender, Residential Capital LLC, GMAC Financial Services has completed a massive, $60 billion refinancing and funding package for the company.

The series of transactions to prop up ResCap include an extension of key bank facilities, a renewal of credit lines, a previously announced distressed-debt exchange and cash offer for $14 billion in unsecured bonds, and a new $3.5 billion, two-year credit facility from GMAC and Cerberus Capital Management, the 51 percent owner of GMAC. If ResCap defaults, General Motors and Cerberus would take the first $750 million of losses.

The refinancing essentially increased the debt capacity of GMAC and decreased that of ResCap, although the total amount of liquidity for the businesses will remain about $40 billion, said GMAC spokeswoman Gina Proia. Importantly, ResCap will have longer maturities on its debt.

James B. Lee, vice chairman of JPMorgan Chase, called the ResCap rescue “one of the largest and most complex refinancings we have undertaken.” More than 50 institutions participated in the refinancing, including Citigroup, Bank of America, and Royal Bank of Scotland.

As part of the $60 billion in transactions, ResCap was able to extend for one year the maturity on almost all of its bilateral bank facilities, totaling $11.6 billion. It also obtained a new $2.5 billion syndicated whole-loan-repurchase facility.

The $60 billion total also includes certain “liquidity actions” taken by GMAC and Cerberus to support ResCap, announced Tuesday in an SEC filing. ResCap is selling its resort funding business to GMAC, and Cerberus is buying ResCap’s model home assets. The private equity firm is also assuming about $300 million of ResCap mortgages and mortgage-backed securities.

For its part, GMAC obtained new capital in the form of a globally syndicated, $11.4 billion secured revolving credit facility. It also renewed a one-year commercial paper back-up in the amount of $10 billion.

In response to the announcement, Standard & Poor’s said ResCap’s refinancing “illustrates the gravity of the company’s financial position.” The ratings service cut Residential Capital’s long-term counterparty credit rating to “selective default” from double-C.

Of particular concern to S&P is ResCap’s exchange and cash tender offer for $14 billion of outstanding debt. “The downgrade reflects the fact that the exchange offer paid less than face value to certain Residential Capital LLC bondholders and left untendered bonds in a subordinated position to the new notes,” S&P said in a statement. But the exchange does not constitute a legal default, S&P said.

Holders of ResCap debt exchanged or sold $8.6 billion of the notes by Wednesday, which was the deadline for the tender offer. Thus, about $5.4 billion of the shorter-maturity notes are still in investors’ hands.

ResCap’s newly issued securities consist of 8.5 percent in second-lien notes due May 15, 2010, which were exchanged for debt maturing in 2008 and 2009, and 9.625 percent junior-lien notes due in 2015 exchanged for debt maturing between 2010 and 2015.

GMAC has been struggling for months to recapitalize ResCap, which lost $859 in the first quarter. It previously increased the size of an existing credit facility and made plans to purchase some of ResCap’s assets.

In a Tuesday SEC filing, ResCap said it needed about $2 billion in cash by the end of June to meet liquidity demands.

The ongoing restructuring plan for ResCap’s business includes a focus on prime, conforming mortgage products, the elimination of noncore businesses and products, and an effort to tap GMAC Bank for lower-cost funding.