Bush Pressures GMAC Bondholders

President Bush clearly spells out his desire for GMAC bondholders to agree to the debt swap to immediately relieve the financial crisis at GM's financing arm.
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Updated from Dec. 18

An

emergency government bailout

is headed to two Detroit automakers --

General Motors

(GM) - Get Report

and

Chrysler

-- for a three-month period, pending reorganization. In laying out the terms of the deal Friday morning, President Bush clearly spelled out his desire for GMAC bondholders to agree to the debt swap as a way to immediately relieve the financial crisis at GM's financing arm and give the company the opportunity to become a bank holding company qualified to seek funding under the Troubled Asset Relief Program (TARP).

Bush said that the restructuring required meaningful concessions from all those involved in the auto industry. He said "In particular, automakers must meet conditions that experts agree are necessary for long-term viability." He pointedly went on to say that this included "persuading bondholders to convert their debt into capital the companies need to address immediate financial shortfalls."

It is clear that President Bush sees that the future of General Motors depends on the survival of

GMAC Financial Services

, and reports previously indicated that the books of GMAC were included in the bailout review by the White House. Today is of course the last day of the latest extension of GMAC's bond swap offering. For the rest of the day GMAC will no doubt be working as hard as possible to get bondholders to agree to the swap, and this time they are backed by some heavy artillery. At 5 p.m. EST GMAC might have some serious thinking to do, if sufficient tenders have not been received.

It was only Wednesday that

Bloomberg

reported GMAC, which is 49% owned by GM, was in a good position to achieve its minimum goal of 75% participation in its bond-for-equity swap. Today it appears that the possibility of achieving the goal is fading rapidly.

Bloomberg reported Wednesday that a lawyer for bankers handling the exchange was "cautiously optimistic" James Clark, a partner at Cahill, Gordon & Reindel LLP , representing firms including

Bank of America

(BAC) - Get Report

and

Citigroup

(C) - Get Report

that are managing the deal told

Bloomberg

that they had received tenders that had not been processed by the last deadline set by GMAC for Dec. 16.

According to

Bloomberg

, Clark said the goal may be within reach, based on the number of calls banks have received from bondholders who couldn't tender on time. It appears that GMAC received an additional $10.5 billion in commitments to exchange bonds for preferential stock from a group of bond holders that had previously been opposed to the swap. It was that commitment that took the total of commitments to around 58% of bonds held, with a minimum target of at least 75% required.

In a statement on Wednesday,

GMAC

said "significant additional participation will be necessary to attain the estimated overall participation -- required to satisfy the condition for a minimum amount of regulatory capital in connection with GMAC's application to become a bank holding company." That "significant additional participation" is around $4.9 billion.

Thursday, hope was fading for the bond swap to succeed.

Dow Jones

reported that Pacific Investment Management Co. (Pimco) might back out of the exchange, and

Bloomberg

reported that Pimco failed to tender its holdings, according to people familiar with the negotiations. Pimco earlier agreed to participate along with the rest of a bondholder committee that sought better terms, said the people, who declined to be identified because talks were private.

"We're disappointed with the follow-through participation through yesterday," said GMAC spokeswoman Gina Proia, in an interview with

Bloomberg

. "However, we're hopeful we can still achieve the needed participation to meet the capital requirement by Friday."

It is not clear whether Pimco tendered its bonds originally and therefore is included in the 58% GMAC announced had been tendered, or whether it simply has held out. Either way, GMAC appears to be struggling to avoid the unenviable decision. Extend the deadline for an unbelievable sixth time, or give up and withdraw the application to become a bank holding company and the TARP funds that could be available as a result.

The White House had been considering bankruptcy in some form for GM, and this possibility might be part of the reason that the bondholders have not wanted to take part in the exchange. If a

GM bankruptcy

were to take place, it is possible that GMAC would follow suit and a preferred shareholder would most likely be wiped out.

Now the President has announced his backing for the auto industry, for the short term, in GM's case, is dependent on GMAC bondholders making concessions that they might not want to make. It is still looking grim for GMAC, and large shareholder

Cerberus

might be prepared to let the company die. Time is rapidly running out.

Gavin Magor joined TheStreet.com Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.