Sean Egan, President of Egan-Jones Speculates on GMAC's Future
Wednesday, December 10, 2008SUZANNE PRATT: Another twist to the General Motors story, the health of its GMAC finance unit. It looks unlikely that GMAC will be able to become a bank holding company and that could mean bankruptcy for the finance company. GMAC said today its $38 billion debt for equity swap has not attracted enough participation. Although GMAC extended its offer to this Friday, it is well short of the minimum capital demanded by the Federal Reserve to qualify for bank conversion. As a bank, GMAC could apply for support from the government's Troubled Asset Relief Program or TARP. Joining me now for a discussion of GMAC's remaining options is Sean Egan. He is president of Egan-Jones ratings company, which rates GMAC bonds junk. Sean, welcome to the program.
SEAN EGAN, PRESIDENT, EGAN-JONES: Thank you.
PRATT: Let me start off by asking you, how likely do you feel that it is that GMAC will have to file for bankruptcy?
EGAN: If things don't change dramatically in the very near future, they'll be forced to file for bankruptcy for the simple reason that it's running out of options. It can't pass the securitization market. The banks are growing increasingly nervous. As you introduced the segment it is not able to get the proper capitalization so it can become a bank holding company and gain access to FDIC funding.
PRATT: So what does that mean for GM, do you think?
EGAN: Well, GM and GMAC are joined at the hip. If GM fails, GMAC fails and the reverse is true. So unfortunately if GMAC is forced to file, a lot of dealers would have difficulty finding financing and a lot of buyers of GM vehicles will have difficulty finding financing. So if it happens, it will be the first in a series of problems in the whole automobile sector. It's not going to stop at GM or GMAC. It's also going to be the other auto companies. There will be the suppliers. There will be the dealers. Unfortunately, it's a whole auto manufacturing, auto support ecosystem that has been eviscerated over the past five years and it's only reached a crisis point within the past couple months.
PRATT: So it's quite the domino effect. Now if they do file for Chapter 11, we're talking about a restructuring though. They are going to emerge from bankruptcy.
EGAN: That is correct. Some people say bankruptcy, they think the company will be liquidated. It does happen that companies are liquidated, but in the case of GMAC, what will happen and what is likely to happen is that the debt will be squeezed down and they'll merge within 12 to 24 months.
PRATT: So when do you think we're likely to see a bankruptcy filing from them?
EGAN: If they don't solve this current problem, we wouldn't be surprised by a filing within the next 30 to 45 days. Hopefully they're able to address the problem. Hopefully the Federal government is able to step up and make it easier for GMAC to become a bank holding company but at this point it seems somewhat unlikely.
PRATT: So what happens to GMAC bond holders in this process?
EGAN: They've already suffered. They've been suffering actually for the past two years. It's the culmination that the value is not what they had expected it to be when they purchased the bonds. That's already reflected in the pricing. I think that they'll just have to come to terms with those people who are still holding it will have to come to terms with GM's and GMAC's tough financial condition.
PRATT: OK, Sean, I think we have to leave it there. Thank you so much for joining us this evening.
EGAN: Thank you.
PRATT: My guest Sean Egan of Egan-Jones ratings company.
