GMAC drums up $21.6 billion in debt-for-equity swaps

GMAC has leveraged the recent promise of U.S. Treasury funds to boost its lending capacity, and now it has generated another $21.2 billion in cash via debt-for-equity swaps with its bondholders. The fund raising is part of the company's' effort to raise enough cash to meet the regulatory requirements of a bank holding company, and therefore become eligible for Troubled Assets Relief Program (TARP) funding.

The U.S. Treasury on Monday announced it would be making $6 billion in funding available to troubled car lender GMAC. The Cerberus and GM-owned entity will get $5 billion in Treasury funds plus another $1 billion from a Treasury-backed General Motors purchase of GMAC equity.

Combined with the $21.2 billion secured in the latest round of debt-for-equity swaps, that brings GMAC's total to $27.2 billion, still $2.8 billion short of the $30 billion that must be raised to officially secure the lender's status as a bank holding company.Last week the U.S. Federal Reserve approved GMAC's request to be considered a bank holding company, effectively paving the way for the auto financing company to apply for federal aid from the $700 billion bailout fund established earlier this year, provided it raises the necessary funds.

The news breathed new life into the troubled finance agency's future, as bankruptcy had been a serious possibility before the Fed's decision. With the approval process cleared and funding now on the way, GMAC's future looks as good as the rest of the industry's - which isn't to say it's smooth sailing from here, even if the additional $2.8 billion in funding is found.

Slow sales in 2008 are expected to be followed by a flat or even worse 2009, and despite the government-funded loans for GM and Chrysler, it's not yet clear that all of the current players will survive to see the next upswing in sales numbers.

GMAC is majority owned by Chrysler's parent company Cerberus, but General Motors owns 49% of the operation as well. Under the new order, however, both GM and Cerberus will have to reduce their stake in GMAC because their primary business is non-banking. GM has therefore committed to to cutting its holding to under 10%, while Cerberus will slash its ownership to 33%.

Nevertheless, the move is seen as a definite boon for the auto industry, and GM in particular. About 85% of GM's U.S. car sales are financed through GMAC, and the potential availability of the bailout funds has brightened the market's outlook for the carmaker.