GMAC Deal Won't Be Automatic

Cerberus Group Might Not Attract Boost in Credit Ratings Needed By the Auto Maker's Finance Unit

By SUSAN PULLIAM and DENNIS K. BERMAN

February 17, 2006; Page C1

Cerberus Capital Management and a private-equity unit of Citigroup Inc. may have emerged as the leading bidder in talks with General Motors Corp. to buy a controlling stake in its General Motors Acceptance Corp. finance unit. But the potential of a deal with the hedge-fund-led group raises financial questions that may make a sale difficult to complete.

Much is riding on whether GM can pull off the GMAC sale. Sealing a deal could help GMAC improve its credit ratings, currently tied to GM's own lowly junk status.

Better credit ratings make it easier to get cheaper financing, which is essential to offering low-cost loans that drive vehicle sales. Already, GMAC has lost several forms of funding, analysts say. Moreover, GM could use the estimated $11 billion in sale proceeds to shore up its coffers in the midst of its major restructuring.

Investors are closely watching the progress of the talks involving one of the globe's biggest companies -- and biggest issuers of debt. GM investors would cheer a GMAC deal, as it could give the auto maker some breathing room to sort out its financial, legal and labor-related problems.

"Our objective is looking to retain a relationship with GMAC to continue to support sales. One way to do that is through an arm's-length commercial agreement," said GM spokeswoman Toni Simonetti. "It's an important part of the ongoing discussions."

Cerberus and Citigroup declined to comment.

Still, a GMAC deal is hardly assured, even with Cerberus emerging as a lead bidder. One issue: Will credit-ratings companies boost GMAC's debt rating after such a sale?

Standard & Poor's Ratings Group, which downgraded GM's credit rating deeper into junk status in December, said that an investment-grade rating for GMAC would be "feasible" if GM sold the unit to a financial institution with a high credit rating and a long-term strategic commitment to GMAC's business. Cerberus and the Citigroup unit don't carry credit ratings, because they don't issue publicly traded debt.

"The private-equity unit of a bank doesn't count as a financial institution, but we haven't tried to come to any conclusion about what these sorts of transactions would be rated with something other than a 51% majority stake by a financial institution," said S&P analyst Robert Schulz.

A potential deal with Cerberus shows how hedge funds -- private investment pools mostly for foundations, endowments and wealthy individuals that were once content to exploit small cracks in the Wall Street investing game -- are increasingly involved with marquee American companies. Indeed, as other potential bidders have slinked away, the GMAC deal's fate rests with a secretive and aggressive hedge fund named after a mythical, multiheaded dog that guarded the entrance to the underworld.

GM's board is expected to make a decision on a GMAC deal either before or at a meeting in early March, say people familiar with the matter. One perspective on the decision came in January from new board member Jerome York, an associate of big GM shareholder Kirk Kerkorian. In a speech, Mr. York preached that the company should be rapidly building its cash cushion, given that it could run out of cash in an estimated 1,000 days, he said.

The GMAC talks have been complicated. The unit has been on the block since October, but a deal hasn't happened yet in part because of a laundry list of issues that have discouraged some big players with high credit ratings from moving forward. For instance, private-equity fund Kohlberg Kravis Roberts & Co. and bidding partner Wachovia Corp. have submitted only a rough indication of interest in GMAC, says a person familiar with the matter.

The most nettlesome issue, say people with experience in the bidding process, has been sketching out a new operating agreement for GM and GMAC that would disentangle 87 years of cooperation between the two entities.

GM and GMAC have a symbiotic relationship. GM provides GMAC with a steady flow of car buyers seeking financing. Should GM's condition worsen, potential buyers are worried about how that volume could decline, hurting GMAC's business. On the other side, GM is looking for assurances that GMAC's financing heft will still be available for customers, as well as for dealers who take out loans to pay for keeping their sales lots full.

This puts GM's board in an excruciating position. The more control the new owners have over those decisions, the better the chances of an improved credit rating, S&P said. But that autonomy also means that a newly formed GMAC may demand terms from GM that make its cars more expensive to buy, or that could upset its dealer network.

In a Jan. 30 research note, S&P analyst Mr. Schulz said, "One key factor in achieving an investment-grade rating would be our conclusions about the extent to which financial support should be attributed to the strategic partner."

It is hard to imagine why GM would want to give such control to a buyer, some analysts say. "Selling GMAC is a little like trying to sell the bathrooms in your house," said Ronald Tadross, an analyst with Banc of America Securities. "It can be done, but there will be a lot of restrictions on when [the seller] can use them. And if your house is falling down, there may not be anyone who wants to buy them."

Lately, buyers have focused on other concerns, too, such as whether GM will be forced to file for bankruptcy protection from creditors. GM has said it isn't considering a bankruptcy-law filing. But some investors and analysts are beginning to worry anyway. Mr. Tadross, for instance, said in a Feb. 13 research note that he believes a bankruptcy filing by GM is "more likely than not."

That possibility has added another layer of anxiety for potential buyers, which fret that if GM were forced to file for bankruptcy, it might cause a sale of GMAC to be unwound, should creditors decide to challenge the sale on legal grounds.

In the event of such a filing, creditors "would examine every imaginable theory to get value into the GM estate," said lawyer Evan Flaschen. "There may not be any merit [to such challenges], but buyers want to walk away with a business and not be stuck in bankruptcy themselves," he says, particularly given the huge price tag of $11 billion.

General Electric Co., for instance, was interested in buying parts of GMAC, but has backed away for the moment, partly because of worries about what a bankruptcy would mean for a buyer of those businesses.

"It's a show-stopper. No one can say they know where a buyer of GMAC would stand if GM declared bankruptcy," said another potential buyer with a high credit rating and strategic interests in GMAC who walked away because of legal concerns.

Among the theories that creditors could advance if GM filed for bankruptcy protection would be that the sale of GMAC represented a "fraudulent transfer" of assets. Such an argument was used by asbestos claimants in a lawsuit against W.R. Grace & Co. and Sealed Air Corp. in which the asbestos groups argued that W.R. Grace placed assets in its Sealed Air unit when it was insolvent in order to put them beyond the reach of asbestos and other creditors.

There is also the concern that if GM filed for bankruptcy protection, a judge could consider GM and GMAC's businesses so intertwined that they should be consolidated for bankruptcy purposes, as the units of Enron Corp. were, for instance, when it collapsed.

Lawyers say the risks of such legal challenges being mounted, much less successful, are minute. "Those are not material risks," said lawyer Thomas Mayer. But, he added, "this would be such a huge transaction that people will be cautious."