ResCap looks to GMAC, Cerberus for help with liquidity needs

By Caroline Salls

Pittsburgh, June 3 - Residential Capital, LLC has agreed in principle to a series of transactions with GMAC LLC and Cerberus Capital Management, LP that will allow ResCap to satisfy its liquidity needs and provide an additional liquidity cushion, according to an 8-K filed with the Securities and Exchange Commission.

Under the GMAC/Cerberus agreement, GMAC has agreed to acquire 100% of ResCap's resort finance business, including its subsidiary RFC Resort Funding LLC, for a cash purchase price equal to the fair market value of the business.

The initial purchase price will be equal to 90% of the net book value of the resort finance business at closing, less outstanding debt under both the related GMAC secured credit facility and a third-party credit facility funding the resort finance business.

On June 3, ResCap expected to receive an initial deposit of $250 million, representing 73.5% of the net book value of the resort finance business. The fair market value of the resort finance business will be determined by one or more independent, third-party valuations.

This transaction is expected to close within 15 business days after ResCap receives the initial $250 million deposit.

RFC and GMAC Commercial Finance, LLC have also agreed to enter into a receivables factoring facility, under which GMAC Commercial Finance will purchase from RFC some receivables due from mortgagors on a non-recourse basis.

ResCap said the proceeds from the receivables facility will be reinvested in additional servicing advances.

The maximum amount of receivables to be purchased under the facility will be equal to the lesser of $600 million and the total amount of eligible receivables, minus a discount rate and reserves.

The receivables facility will mature one year from closing.

This transaction is expected to close no later than June 15, and $500 million of receivables are expected to be sold in June.

Cerberus to buy assets

Additionally, Cerberus has committed to buy $475 million of ResCap's assets for $225 million in cash and a series B junior preferred membership interest in a newly formed entity.

The new entity will not be a ResCap subsidiary, and the managing member will be an affiliate of Cerberus.

The new company will purchase from ResCap model home assets of GMAC Model Home Finance, LLC, KBOne, LLC, LENOne, LLC, GMCMTH, LLC and WPSHOne, LLC through an equity acquisition.

To fund the new company's purchase of the assets, Cerberus will provide a term loan in a principal amount equal to the cash payment amount that will bear interest at a rate of 15% and will mature on June 30, 2013.

ResCap said Cerberus will receive all $10,000 of the series A preferred membership interests of the new company, plus all amounts contributed by Cerberus following the closing to fund expenses.

According to the filing, the series A senior preferred membership interests will carry a preferred return equal to the difference between the greater of 20% of the cash payment and a 20% per year return on the total amount of the initial $10,000 investment, the cash amount and any additional capital contributions by Cerberus to the new company, as well as the interest paid on the term loan.

Cerberus will also receive all of the common membership interests of the new company.

Meanwhile, the series B junior preferred membership interest will be issued to ResCap with a liquidation preference equal to the difference between the net book value at closing of the assets and the cash amount, with the liquidation preference increasing by a preferred return of 20% per year.

ResCap said the series B interest cannot be more than $250 million.

After payment in full of the term loan, ResCap said the holders of the series A senior preferred membership interests will be entitled to all distributions from the new company before any distributions on the series B junior preferred membership interests or any other membership interests.

Following payment of the return of the series A senior preferred membership interests, ResCap will be entitled to full payment of the liquidation preference of the series B junior preferred membership interests and then Cerberus, as holder of the common membership interests, would be entitled to any remaining surplus.

ResCap said it will pledge all of the series B junior preferred membership interests to secure the proposed senior secured credit facility with GMAC and the new notes being offered in ResCap's private exchange offer.

Cerberus' commitment is subject to completion of ResCap's private debt tender and exchange offers, which are expected to close by June 5.

ResCap said Cerberus has also committed to buy, at ResCap's option, some of its performing and non-performing mortgage loans and mortgage-backed securities for $300 million in net cash proceeds.

The company said it will start identifying the assets to be sold to Cerberus, and, if Cerberus disputes that the fair market value of those assets is at least $300 million, ResCap can designate additional performing and non-performing mortgage loans and mortgage-backed securities for sale to Cerberus.

ResCap can ask Cerberus to sell the assets through an auction process within 10 days of the sale to Cerberus.

To the extent that the assets are sold by Cerberus for more than $300 million in net cash proceeds, Cerberus will make an equity contribution to ResCap to account for the excess amount.

Cerberus' commitment is subject to the receipt by ResCap of a fairness opinion from a nationally recognized investment banking, accounting or appraisal firm.

In addition, ResCap said it intends to sell some of its performing and non-performing mortgage loans and mortgage-backed securities through a brokered auction process, and Cerberus has committed to make bids to purchase those assets for $650 million of net cash proceeds.

Liquidity initiatives

According to the 8-K, GMAC Financial Services and ResCap, its wholly owned mortgage subsidiary, have outlined initiatives to stabilize the liquidity position of the mortgage unit and to provide enough funding to operate the business to comply with covenants in its finance agreements.

ResCap said these initiatives include extending near-term debt maturities, refinancing credit facilities, extending new facilities and selling assets.

ResCap said it and GMAC have been working with their banking partners on plans to refinance various credit lines at both companies.

In May, ResCap said it launched private debt tender and exchange offers to extend near-term maturities and provide financial flexibility.

According to interim exchange results, roughly 80% of notes maturing in 2009 and 2009 were tendered as of May 21 and 63% of notes maturing from 2010 to 2015 were tendered.

In addition, GMAC has announced that it is in negotiations to provide ResCap with a new $3.5 billion senior secured credit facility.

GMAC and ResCap have also reached an agreement for GMAC to contribute roughly $250 million principal amount of ResCap's floating-rate notes due June 2008 to ResCap in exchange for additional ResCap preferred units, which are exchangeable at GMAC's option at any time after Jan. 1, 2009 into preferred units of IB Finance Holdings, LLC, the owner of GMAC Bank.

GMAC also tendered $93 million principal amount of ResCap's 8 1/8% notes due 2008 in exchange for new notes.

To satisfy its liquidity needs and comply with covenants expected to be included in new debt agreements requiring maintenance of minimum cash balances, ResCap said it thought it was required to complete asset sales or other capital generating actions over and above its normal mortgage finance activities in the near term, as well as to complete previously budgeted asset sales to provide $600 million of additional cash by June 30.

However, ResCap said it now estimates that it may need up to $1.4 billion in additional cash to meet its near-term liquidity needs based upon internal cash forecasts targeting sufficient cash surpluses and expected cash covenants.

ResCap said the additional cash requirement stems from the inability to complete $1.3 billion in asset sales because of adverse conditions, which were previously included in its liquidity forecast, as well as the adverse movement of hedge collateral, decreases in advance rates under some of its bilateral facilities and fees in connection with the amendment and extension of the bilateral facilities.

GMAC loan amendment

Additionally, ResCap and GMAC LLC have entered into an amendment to their April 18 loan and security agreement that increases the maximum facility amount to $1.2 billion from $750 million and increases the advance rate to 85% from 50%.

ResCap said it expected to draw $450 million under the amended facility on June 3.

ResCap is the Minneapolis-based mortgage lending unit of General Motors Acceptance Corp.

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