GMAC Financial Services has announced a series of actions intended to strengthen the company's capital base and minimize further adverse effects on GMAC related to Residential Capital LLC (ResCap), and improve access to the capital markets over time.
The actions include a capital infusion of $3.79 billion from the U.S. Department of the Treasury, consisting of the purchase of $2.54 billion of trust preferred securities, with a coupon of 8%, and $1.25 billion of mandatorily convertible preferred securities (MCP) with a coupon of 9%.
In addition, all the GMAC non-convertible preferred stock held by the Treasury will be exchanged for $5.25 billion of newly-issued MCP, and $3.0 billion of existing MCP held by the Treasury will be converted into GMAC common equity. Following the conversion and new issuances of MCP, the Treasury will hold a total of approximately $11.4 billion of MCP.
As part of its write-down of approximately $2.0 billion of mortgage assets at ResCap, GMAC has reclassified certain international mortgage assets and businesses from held for investment (HFI) to held for sale (HFS), resulting in an estimated pre-tax charge of approximately $1.3 billion. As of Sept. 30, the assets had an unpaid principal balance of $2.4 billion and a carrying value (net of allowance for credit losses) of $2.0 billion.
The company also reclassified domestic mortgage assets from HFI to HFS, resulting in an estimated pre-tax charge of approximately $700 million. As of Sept. 30, the assets had an unpaid principal balance of $3.3 billion and a carrying value (net of allowance for credit losses) of $2.3 billion. Additionally, management recorded a repurchase reserve expense of approximately $500 million associated with the mortgage servicing business.
GMAC says these transactions will allow the company to explore strategic alternatives for ResCap and the mortgage business and are expected to accelerate the timetable for repayment of the U.S. government's investment. The company has achieved the capital buffer required under the Federal Reserve's Supervisory Capital Assessment Program needed to meet the worse-than-expected economic scenario.
As protection for taxpayers, GMAC will continue to be subject to a variety of covenants and requirements, including the executive compensation and corporate governance requirements of Section 111 of the Emergency Economic Stabilization Act, the Treasury notes. As an ongoing recipient of what the Treasury deems ‘exceptional’ assistance, GMAC remains subject to the oversight of the department's Special Master for Executive Compensation, Kenneth Feinberg.
The Treasury adds that this restructuring of its investment in GMAC was completed with $1.8 billion less capital than was projected in May.