The GMAC Game of Chicken

The NY Times does a good job today of explaining what's going on at GMAC (GKM), although it doesn't quantify the haircut that the company is asking bondholders to accept; my commenters put it in the 10% range, which seems roughly right. If GMAC can convert 10% of its debt into equity, that should be more than enough to become well-capitalized enough to become a bank.

But the key player here is Cerberus, which owns 51% of GMAC, and whose equity stake in the lender would likely be wiped out were GMAC to declare bankruptcy; "industry experts" are quoted in the article as saying that a bankruptcy filing could come as soon as this month if neither bondholders nor shareholders recapitalize the company.

So what we have is a game of chicken. Neither bondholders nor shareholders are likely to be well served by a bankruptcy; both would be better off recapitalizing the company now, either through a debt haircut or through a cash injection. But the shareholders want the bondholders to step up (hence the tender offer), while the bondholders reckon there's no way the majority shareholder will simply let GMAC fail:

Some bondholders see the bankruptcy threat as a bluff. Pimco, the giant money manager in California, is one bondholder that is unconvinced that Cerberus would actually push GMAC into bankruptcy, according to people close to the matter.

Cerberus has been consistently high-handed and opaque in its dealings not only with bondholders but also with Congress; it's an understandable tactic for a relatively secretive private-equity fund, but one which has clearly backfired in recent weeks. Now, it's crunch time. Either Cerberus really engages GMAC's bondholders (and it's probably too late for that at this point), or else it will be forced to choose between throwing good money after bad, on the one hand, or seeing a major portfolio company fail, on the other.

Comments

[Thomas Smic...:]

And the SmartNote small investors are apparently screwed in any event.

2008 Dec 11 02:49 PM

[OldNavySailor:]

Today I sold three GMAC bonds out of my retirement portfolio that will mature next year (2009). I took a loss of .50 cents on the dollar but it will be much worse when GMAC goes bankrupt.

GMAC is not offering to buy the debt of all bondholders, just selected European and U.S. bonds based on interest rate and maturity date. I think this is a mistake if they want to raise cash quickly. They should open up the offer to all holders of their debt via a Dutch Auction process.

The decision to sell was based on my opinion that no "white knight consortium" will come to GMAC's rescue: not the parent company Cerberus, not bondholders, not investors, certainly not GM and not the government. They have too much debt caused by poor business dealings.

Note - I bought a 2006 Chevrolet Impala new with GMAC 0% financing. Maybe that's one of the reasons why GMAC is going bankrupt!

2008 Dec 11 05:22 PM

[a. palmer jr.:]

I sure would like to hear a story about an American company that is run well, is not leveraged to the hilt, doesn't screw the bond and stock owners, etc. Does such a company exist?

2008 Dec 12 11:30 AM

[TinyTim:]

This scenario is right out of the Ultimate Game theory.
Wonder if human nature still applies in committees.
the phenomona of "risky shift" also applies.

2008 Dec 12 03:58 PM

[TinyTim:]

sorry-
that would be the Ultimatum Game
en.wikipedia.org/wiki/...

2008 Dec 12 04:13 PM