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Fellow Fools of the Bond Planet!

How about some input and thoughts on GMAC bonds. If there is another rate hike I think there should be enough available with YTM% of ~11%, Maturing 2009, not callable. Right now I am trying to find an individual qty @ $5 per bond, over the $40 minimum that Ameritrade is going to stick me with.

Stand back - The Doctor is pulling out the prescription tablet.

Now is your chance to speak up! BB rated? Why? Should the sins of the father be upon the heads of the bonds?


DrTarr

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GMAC bonds are backed by the assets they are used to purchase. That is all those leased vehicles out there and many dealer originated loans. Some may be subprime accounts, but I suspect that many are solid.

Because the assets that back them are real, they are considered more secure than GM's other bonds, which are subject to all of their other liabilities. If however GM declares bankrupcy to unload its legacy costs, how will holders of GMAC bonds fare? Many suspect those assets too will be sucked into the process.

However, GM needs a good interest rate to be competitive. So it might be better off to sell GMAC to someone else with a better credit rating. There were rumors GMAC was to be sold to a major financial institution. That would solve the bankrupcy problem. But I have not heard that a deal went through. And will unions and others allow such a deal to go through--putting major assets out of reach of a GM settlement. GM presumably will get substantial cash from the deal. And they were to retain equity to continue to receive profits, as it is one of their most profitable businesses.

So I would think that a junk rating of BB is appropriate for GMAC for now. But stay tuned. Things could change.
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GMAC bonds are backed by the assets they are used to purchase. That is all those leased vehicles out there and many dealer originated loans. Some may be subprime accounts, but I suspect that many are solid.

Over the last 6 months to a year, I've periodically read articles that have hinted that the assets backing these loans are not as solid as one might thing. The premise of most of the articles were that there is a glut of "off lease" vehicles on the used car lots, and that in many cases their values are less than originally assumed. With recent higher gasoline prices, SUVs have declined in value the most.

What isn't clear to me is how the decline in asset value affects GMAC.
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Why? Should the sins of the father be upon the heads of the bonds?

Because GMAC's revenue stream depends on a steady influx of loans generated by GM dealerships.

If GM stops selling cars, they'll stop sending loans GMAC's way.
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If however GM declares bankrupcy to unload its legacy costs, how will holders of GMAC bonds fare? Many suspect those assets too will be sucked into the process.

Since the assets (actually the LOANS on the vehicles, not the vehicles themselves) are encumbered by the bonds, GMAC can't just transfer them. However GM might try to take GMAC's other assets, and that's why the market assigns a risk to GMAC.

No deal has yet gone through selling GMAC nor any part of it, but it's strongly rumored (certain parts of GMAC are quite profitable, and thus very interesting to buyers).
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Over the last 6 months to a year, I've periodically read articles that have hinted that the assets backing these loans are not as solid as one might thing.

The "off lease" vehicles belong to the dealer, not to GM nor GMAC. They are not encumbered by any loan.

I really don't know how leases are structured. Who takes the risk of the car depreciating more than expected? I would expect it would be the dealer, not GM nor GMAC.
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DrTarr,

Why? Should the sins of the father be upon the heads of the bonds?

Because as long as they are within the house of GM their fate is tied to the fate of the entire company. We don't bankrupt half of a company. This is why there is so much speculation that GMAC will be sold or spun off.

jack
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jack,

You can bandrupt a subsidiary of a company. I don't know how GM is set up, that is if each automobile brand is a subsidiary.

brucedoe
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Bruce,

Correct, I subsidiary is by definition an independent entity owned by another entity. From my understanding the brands, GM and GMAC are all under the same roof but I haven't kicked that rock over in recent history.

jack
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Because as long as they are within the house of GM their fate is tied to the fate of the entire company. We don't bankrupt half of a company.

True, but GMAC is its own company, one that just happens to be wholly owned by GM. GMAC is not responsible for GM's debts (and vice versa). If GM goes bankrupt, GMAC as one of its assets will be disposed of as declared by the bankruptcy trustee.

The risk with GMAC is that GM will sell some of GMAC's assets and just keep the money making it unavailable to pay the bondholders (this is known as "looting the subsidiary") but this would most likely be considered fraud.
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jr,

nice clarification. Much better then my bumbling answer.

jack
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True, but GMAC is its own company, one that just happens to be wholly owned by GM. GMAC is not responsible for GM's debts (and vice versa). If GM goes bankrupt, GMAC as one of its assets will be disposed of as declared by the bankruptcy trustee.

The risk with GMAC is that GM will sell some of GMAC's assets and just keep the money making it unavailable to pay the bondholders (this is known as "looting the subsidiary") but this would most likely be considered fraud.


Is the same thing true for Ford Motor Credit Company?
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Is the same thing true for Ford Motor Credit Company?

Yep.

It's also true for GE Capital and General Electric, although these guys are not in as much trouble.

Look at the rates they each offer on direct-to-consumer short-term debt:

Ford:
http://www.fordcredit.com/interestadvantage/index.jhtml
5.21%, 5.37%, 5.53% depending on how much you invest

GM: (note you must be a GM employee, contractor, stockholder, or family member to qualify)
http://www.demandnotes.com/
5.75%

GE:
http://www.geinterestplus.com/index.html
4.23%, 4.29%, 4.75% depending on how much you invest, they occasionally have specials where you get a $25 bonus on deposit
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True, but GMAC is its own company, one that just happens to be wholly owned by GM. GMAC is not responsible for GM's debts (and vice versa). If GM goes bankrupt, GMAC as one of its assets will be disposed of as declared by the bankruptcy trustee.

The risk with GMAC is that GM will sell some of GMAC's assets and just keep the money making it unavailable to pay the bondholders (this is known as "looting the subsidiary") but this would most likely be considered fraud.


I don't understand this statement. If GM sells portions of GMAC for, say, $15B, then doesn't that $15B go into GMs cash trove? And if at some later time GM declares chapter 11, doesn't the cash (or a portion of it) in their treasury become avaialble to satisfy the bondholders?

How, then, do they make it "unavailable to pay the bondholders"?
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How, then, do they make it "unavailable to pay the bondholders"?

If GM splits GMAC and sells part of it, and the remaining part doesn't have enough income to service its debts, then mini-GMAC will default and be unable to pay its bondholders. The assets of mini-GMAC will be distributed to the bondholders but this represents less than their invested capital. Meanwhile the rest of GMAC's assets are in GM's bank account.

This would be a "rational" thing for GM to do if they determined that part of GMAC has a negative value. I would think though that the GMAC bondholders would get up in arms over any sale/spinoff plan that increases the chance of GMAC bankrupcy.
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How, then, do they make it "unavailable to pay the bondholders"?

To add to jr's well thought out words, the other issues is that unless GM can stop the bleeding that money extracted from GMAC acts as a lifeboat with a pile of leaks. Its a band-aid. To borrow from Loki's words it enables GM to continue down the same path for a little while longer.

jack
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<<How, then, do they make it "unavailable to pay the bondholders"?>>

If GM splits GMAC and sells part of it, and the remaining part doesn't have enough income to service its debts, then mini-GMAC will default and be unable to pay its bondholders. The assets of mini-GMAC will be distributed to the bondholders but this represents less than their invested capital. Meanwhile the rest of GMAC's assets are in GM's bank account.

This would be a "rational" thing for GM to do if they determined that part of GMAC has a negative value. I would think though that the GMAC bondholders would get up in arms over any sale/spinoff plan that increases the chance of GMAC bankrupcy.


First of all, I was asking how GM itself (the parent) could go bankrupt while shielding the assets (or cash from the sale) of GMAC.

And it certainly should be illegal to split up a company and place the obligation of all the bonds in one half with the prime assets in the other half and then allow the weak half with all the bonds to default!
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I thought the point of the thread is "why are GMAC's bonds so high yield, that is, viewed as risky by the market". That's what I've been trying to explain.

GM's troubles are known, and we were trying to determine why the parent's sins are infecting the child.

Obviously if GM goes bankrupt, either GMAC will be sold & the cash distributed to the GM's creditors, or GMAC will already have been sold and the cash from it will be

And it certainly should be illegal to split up a company and place the obligation of all the bonds in one half with the prime assets in the other half and then allow the weak half with all the bonds to default!

I totally agree, but if the owners want to do that, they can, unless the bond covenants say they can't.
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The "off lease" vehicles belong to the dealer, not to GM nor GMAC. They are not encumbered by any loan.
_____________________*,*__________________-


These belong to the entity that bought the paper, GMAC. At the end of the lease they try to sell them to the lessee, then they try to the dealers, then they go to remarketing (auction). So the dealer does not have the exposure.

DrTarr
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GM's troubles are known, and we were trying to determine why the parent's sins are infecting the child.

Obviously if GM goes bankrupt, either GMAC will be sold & the cash distributed to the GM's creditors, or GMAC will already have been sold and the cash from it will be


________*,*_____________-

Lets start with is the child (GMAC) a viable entity? Looking at the consolidated financials on EDGAR, it appears so.

So what could happen?

If GM sells GMAC, then the cash from the sale goes to GM and is done with as GM decides, unless there is a trustee, then he decides. But what happens to GMAC bond values at that point? Under a new entity, will rates go down, value goes up. Somewhat dependant on the new parent but my thought is better than BB.

If GM files bankruptcy, then GM (trustee) puts GMAC back on the block. Because you can't raid the bonds of the child to pay the debts of the parent. I see this as more of a mess and starting default on those bonds leads to suits the trustee would not want (well he is a lawyer maybe he does) So, all the bonds continue to pay until liquidated or matured.

What I see is the underlying quality of the assets. How risky is that?

How does GMAC lend out money at 0%? or 2.9%, the extra comes from the parent, so the problem I see is that if the parent goes under, then the incentives for GMAC to do these lower rates goes away and GMAC can not get the quality of loans it may have been enjoying. But, this only effects the bonds that are put out in the future. I can see those being riskier for this reason, lower quality loans. They may be forced to take more sub-prime just to stay in the game.

The assets that secure the bonds that are out there now, are the loans, the cars, that have already been loaned on. And I am not seeing the risk premium or returns of high 10%'s as being justified. Meaning that the risk should be put these maybe in the 7-8% range or so.

Ford I think is in the same boat. Ford Credit provides the financing or buy's the dealer paper. Same as Toyota, I mean Toyota's bonds are paying the high 4%'s. The security is the same - car loans. I don't see GMAC loans (or owners) any more susceptible or likely to default.

I think this is a case of Mr. Market not being efficient or rational. But hey, I am just a small investor so how would I know?

DrTarr


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