GMAC's ResCap strapped for cash

Mortgage leading unit of GMAC says it needs $2B in cash by June to remain solvent - three times more than its earlier estimate.

June 3, 2008: 1:39 PM EDT

NEW YORK (AP) -- Residential Capital LLC, the mortgage lending unit of GMAC LLC, said Tuesday it needs more than three times more cash to stay in business than it estimated just weeks ago.

ResCap estimates it now needs about $2 billion in cash by the end of June to meet liquidity demands, according to a regulatory filing with the Securities and Exchange Commission. It previously estimated it needed just $600 million by the end of the month.

"The change in the number is not a positive development," said Christopher Whalen, managing director at the consulting firm Institutional Risk Analytics. "ResCap may have to restructure."

Loss estimates revised
But, ResCap is not the only company in this predicament, Whalen said. Financial firms across the board are continuing to revise loss estimates and will likely do so throughout the year, he said.

Whalen said ResCap's potential losses could grew even further, requiring more than the $2 billion it now needs because he does not expect the residential and commercial lending markets to bottom out until 2009.

As the mortgage lending market deteriorated rapidly, starting in the middle of 2007, ResCap posted large losses. It continues to lose money, putting it in danger of failing to meet financial obligations. ResCap lost $859 million during the first quarter.

In an effort to meet the cash requirements, ResCap increased the size of an existing credit facility with parent GMAC (GOM) and is selling some of its assets to GMAC and its majority stakeholder, private equity firm Cerberus Capital Management.

Cerberus dismisses report
On Monday, Cerberus denied reports that it recently sold an equity stake in GMAC. Cerberus led a group of investors that purchased the financial unit of General Motors Corp. for $7.4 billion in 2006. A spokesman for Cerberus said the private equity firm has not reduced its equity stake in GMAC since it completed the acquisition.

GMAC's former owner, General Motors, which still holds a large minority stake, is also facing its own struggles. On Tuesday morning, GM said it will shut down four truck and SUV plants in North America.

In its effort to raise the necessary capital, ResCap on Tuesday will draw $450 million from an expanded credit facility with its parent, according to the regulatory filing. The expanded facility allows ResCap to borrow up to $1.2 billion from GMAC. The previous credit facility allowed for borrowings of up to $750 million. The advance rate on the facility was also expanded to 85% from 50%.

ResCap will sell a wide variety of assets to GMAC and Cerberus, including its resort funding division. GMAC will acquire the resort funding business for an initial price of 90% of the businesses book value, with a final sale price of fair value for the division. Fair value will be determined by a third-party appraiser.

An initial deposit of $250 million, representing about 74% of the division's book value, will be paid Tuesday.

Cerberus will purchase ResCap model home assets with a value of about $475 million as part of the asset sale. Cerberus will also purchase an additional $300 million of mortgages and mortgage-backed securities.

ResCap will also receive servicing advances from GMAC Commercial Finance.

The mortgage lender is also in the midst of a debt exchange program that will help extend the mid. "You know yesterday it was panic here. Usually we miss important things in panic."