Updated from 8:40 a.m. EDTGeneral Motors ( GM) announced a long-awaited deal Monday to selloff a majority stake in GMAC, the finance subsidiary that has recently been the automaker's only profitable business, in return for $14 billion in cash over the next three years. Despite its profitability, GMAC's credit ratings have suffered over the last year at the hands of its parent's dismal financial condition. Its sale has the potential to restore investment-grade ratings for the business and prevent spiraling borrowing costs from wiping out its profitability. But initial commentary circulated through the credit market suggests the buyer, a private equity consortium led by Cerberus Capital Management, may not be able to immediately improve GMAC's ratings. For its part, GM unloaded its crown jewel out of a pressing need for cash as it juggles dwindling market share, a burgeoning cost structure, dicey consumer spending and
Citigroup ( C) will provide $25 billion in a syndicated loan to support GMAC's continuing business, in addition to an initial equity investment in GMAC. GM shares recently were down 56 cents, or 2.6%, to $20.71.
Tynan said the process of doing due diligence in order to complete the sale of GMAC may have brought these issues to light. "This might not be as beautiful a rose as it looked like when it was hidden under the GM umbrella with everything that's gone on," he says. GMAC's plan to restate its earnings came after its parent was forced to acknowledge that its losses for 2005 were worse than it had originally reported. In mid-March, GM
widened its loss for the year to $10.6 billion from its previously reported $8.6 billion, due to larger-than-expected charges for its sweeping restructuring in North America and a host of other issues. The company's financials remain under scrutiny from federal regulators for a number of issues, including supplier credits and raw materials contracts.
Ross, who holds positions in GMAC and GM bonds, added that he doesn't believe a secular change in the rate of demand for housing in the U.S. is underway. He believes residential mortgage financing will remain a positive business for GMAC. He also said he believes that GMAC's principal business, financing and leasing vehicles sold to consumers, remains favorable. The deal also raises questions about how GM's relationship to GMAC will play out now that it's not a majority owner of the finance business. "A private equity shop does not make investments forever," Ross says. "If they're going to own 51% of GMAC, and GM is going to own 49% of GMAC, what is going to happen years down the road? How does Cerberus calculate their earned return if they don't at some point have an exit? And, what is the relationship between GM and the buyer as it relates to the continuing relationship between the two and what the goals of each party is? In the past, we've only had to worry about the goals of one party -- GM. Now, things will be different."