GMAC introduces ResCap credit default swaps as bargaining chip in bond exchange, market source says

By Paul A. Harris

St. Louis, Dec. 19 - By taking the novel step of directly mentioning the credit default swaps of Residential Capital, LLC (ResCap) in a Friday press release, GMAC Financial Services appears to be using those debt insurance contracts - to which neither GMAC nor ResCap are parties - as bargaining chips in GMAC's massive $38 billion debt exchange deal, a market source said.

It's a veiled way of threatening the CDS value of those who have not been cooperative in the exchange, said the source, who is not involved in the deal but has been observing it.

In Friday's press release GMAC announced that in connection with the exchange and cash tender offers for certain of its and its subsidiaries' and ResCap's outstanding notes, GMAC intends to transfer the ResCap notes that it acquired in a debt-for-debt exchange to ResCap, in exchange for all or a majority of the non-voting common equity of IB Finance Holding Co. LLC held by ResCap.

IB Finance is the parent entity for GMAC Bank.

The ResCap notes are to be equal to at least 25% of ResCap's outstanding debt.

Immediately following the IB Finance transaction, ResCap would cancel its old notes acquired from GMAC.

In the final sentence of the press release GMAC states "Whether or not the IB Finance Transaction will constitute a 'Succession Event' with respect to any credit default swap contracts related to the ResCap old notes or otherwise will be a function of the terms of such contracts between the applicable parties."

"If you have credit default swaps on ResCap, when the ResCap debt is exchanged for GMAC debt that's possibly a succession event," the market source said.

"By trading the ResCap bonds for this holding company of GMAC Bank you're trading the ResCap debt for something that is less risky, which means the value of the credit default swaps would go down [depending upon at which side of the CDS contract the holder is positioned].

"So some people who are holding the CDS are going to take a loss on that."

Although it is difficult to determine from the outside whether GMAC bondholders are also holders of ResCap CDS, a potential reason for GMAC subordinated bondholders holding out of the exchange is because they don't want the value of the ResCap CDS to decrease, the source said.

On Thursday GMAC said it received tenders for $16.9 billion, or 58%, of GMAC notes and $3.5 billion, or 38%, of Residential Capital, LLC notes in its private exchange offers and tender offers as of the end of the day on Dec. 17.

GMAC needs to achieve at least $30 billion of total regulatory capital to meet the Federal Reserve's requirements for it to become a bank holding company, and it needs roughly 75% participation in the offers in order to meet this condition.

New recession, new twist

It appears legal for GMAC to make statements regarding ResCap CDS in a press release - statements that might actually impact the value of the CDS - because CDS are bilateral contracts, as opposed to securities, even though they are traded as securities, the source pointed out.

Even though companies are not parties to these contracts, they have lately demonstrated an awareness that they can leverage the value of these liquid contracts to promote or discourage actions by creditors and securities holders that might impact the company's balance sheet.

"This is a great example of why restructuring discussions are totally different from the last recession, because no one had CDS back then," the source observed.

"It changes all the motivations."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.