GMAC Unit Poses a Challenge
To Cerberus Capital Management

Pressure is mounting on Cerberus Capital Management LP and General Motors Corp. to prod GMAC Financial Services into fixing its ailing mortgage unit, as the credit-market shakeout ripples beyond the lending industry.

The troubles concern GMAC's Residential Capital LLC, once a big source of profit but now burdened with a portfolio of loans rapidly declining in value. That has put the unit, known as ResCap, in danger of violating terms of loan agreements, triggering concerns that its lenders will demand immediate payment or force the unit into bankruptcy protection if GMAC or its owners don't step in with an equity injection or take other steps.

A GMAC spokeswoman said the lender "is closely monitoring" ResCap and has communicated a turnaround plan. In recent weeks, GMAC has said ResCap would make only loans it could sell instead of keeping on its books.

Cerberus, which leads a group that last year bought a 51% stake in GMAC from GM, has tightened its grip. Tuesday, GMAC said it hired Bank of America Corp. executive Rob Hull to become its chief financial officer. Mr. Hull succeeds Sanjiv Khattri, who will remain with GMAC as ResCap's chief financial officer and head of corporate strategy.

The management change suggests the company's owners "are not willing to give up yet," said Andrew Feltus, a fund manager at Pioneer Investment Management Inc. in Boston, who oversees $9 billion in high-yield debt, including GMAC bonds.

Kathleen Shanley at GimmeCredit said bankers are likely to agree to an amendment or waiver of covenant provisions "as long as they believe the parent company is also committed to working through the problems."

The mortgage industry is smarting from rising delinquencies, especially on subprime loans, amid the nation's worst housing slump in more than a decade. ResCap, once the jewel of GMAC's portfolio, said the downturn has forced it to sell many of its subprime assets at a loss.

Cerberus faces other credit-related challenges that have imperiled deals. A Cerberus spokesman declined to comment.

GM is undertaking a costly restructuring of its North American auto operations and wants businesses like GMAC to boost profitability. A GM spokeswoman declined to comment on ResCap's financial condition.

Concern also is heating up among GMAC's other investors, which include several private-equity firms, banks and hedge funds that backed Cerberus. A person familiar with GMAC's strategy acknowledged that the "temperature" from its big investors "is high as it should be."

At the end of the third quarter, ResCap had net worth of $6.2 billion, down from $8.4 billion a year earlier. If its net worth falls below $5.4 billion by Dec. 31, the unit could violate covenants on portions of its unsecured credit lines. Such covenants enable banks to call loans or require additional cash as collateral if the borrower's financial condition deteriorates.

Yesterday, some long-term ResCap bonds traded near 60 cents on the dollar, down from 80 cents a month ago. The trading levels mark "a sign of doubt related to whether people are going to get their money," said Brad Rubin, automotive-credit analyst with BNP Paribas SA. He said the market will keep a close eye on GMAC's fourth-quarter performance for signs that ResCap could buckle under the weight of its subprime-loan exposure.

"The question is if GMAC is going to cut ResCap loose," said Mr. Feltus, of Pioneer. ResCap "was a nice business when it's working, but right now, it's more of a black eye."

ResCap has scaled back on subprime mortgages this year. Still, subprime loans accounted for 62% of its $59 billion in loan-held-for-investment portfolio as of Sept. 30.

During a conference call with investors and analysts this month, Mr. Khattri said GMAC and its owners remain committed to ensuring adequate liquidity and capital for ResCap, and he remains "quite confident" about a turnaround in the mortgage business.

Mr. Hull was recruited by Al de Molina, a Bank of America executive whom Cerberus named chief operating officer in August. Mr. Hull joined Bank of America in 2001 as the acquisitive retail giant was grappling with disparate systems and cultures. He rose quickly, overseeing finances for the credit-card unit, then wealth management.

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