GMAC considers new mortgage unit
NEW YORK, Jan 13 (Reuters) -
The finance arm of General Motors Corp. (GM.N: Quote, Profile, Research) on Thursday said it was considering setting up a separate subsidiary for its residential mortgage lending business, in a move analysts said was meant to protect the mortgage operations in case GM's debt ratings are cut to junk.
The move may also enable GM to sell off the unit in the future, analysts said.
Bond investors believed setting up a mortgage subsidiary signals that GM sees a downgrade as a real possibility, which forced GM bond prices lower relative to Treasuries in heavy trading. GM shares fell, as automakers' shares generally declined.
GM officials did not return phone calls seeking comment.
Rating agency Moody's Investors Service affirmed the ratings of General Motors' finance arm, General Motors Acceptance Corp., at a level three steps above junk, noting that this move is not expected to be to the disadvantage of current bondholders.
GM and its financing arm are rated one step above junk status by Standard & Poor's. Given the headwinds the company faces this year, including rising interest rates and high auto inventories, getting cut to junk status is possible, analysts said.
GMAC said that it is considering placing its residential mortgage operations in a newly formed holding company to be named Residential Capital Corp.
That unit would seek its own credit ratings based on its debt and equity structure. Mortgage banking accounted for about half of GM's pretax earnings in the first nine months of 2004.
The move may be a prelude to selling the residential mortgage arm, perhaps in an initial public offering, said Nik Vasilakos, a bond analyst at Merganser Capital in Boston. GM has a history of selling off profitable units to generate cash, as it did with Electronic Data Systems Corp. (EDS.N: Quote, Profile, Research) in 1996.
But the move may also be designed to ensure GMAC's residential mortgage arm can still borrow money cost effectively if GMAC gets cut to junk, said Darin Feldman, a portfolio manager at Aladdin Capital in Stamford, Connecticut.
"Bond investors seem to take this as an admission that a downgrade is coming, but it's just a prudent measure to address a situation that is out of GMAC's hands. They can't control what the ratings agencies do," Feldman said.
GM bonds sold off relative to Treasuries on the news. Yield spreads, or the extra yield over Treasuries that investors demand for taking a company's credit risk, on GMAC's 6.75 percent notes due 2014 widened 0.04 percentage point to 2.79 percentage point. The bonds traded as much as 0.06 percentage points wider, according to MarketAxess.
The company's bonds widened about 0.01 percentage point more than Ford Motor Co's.
Meanwhile, shares of GM fell 64 cents, or 1.67 percent, to $37.75. Ford's shares fell 1.47 percent to $14.11.
The finance arm of General Motors Corp. (GM.N: Quote, Profile, Research) on Thursday said it was considering setting up a separate subsidiary for its residential mortgage lending business, in a move analysts said was meant to protect the mortgage operations in case GM's debt ratings are cut to junk.
The move may also enable GM to sell off the unit in the future, analysts said.
Bond investors believed setting up a mortgage subsidiary signals that GM sees a downgrade as a real possibility, which forced GM bond prices lower relative to Treasuries in heavy trading. GM shares fell, as automakers' shares generally declined.
GM officials did not return phone calls seeking comment.
Rating agency Moody's Investors Service affirmed the ratings of General Motors' finance arm, General Motors Acceptance Corp., at a level three steps above junk, noting that this move is not expected to be to the disadvantage of current bondholders.
GM and its financing arm are rated one step above junk status by Standard & Poor's. Given the headwinds the company faces this year, including rising interest rates and high auto inventories, getting cut to junk status is possible, analysts said.
GMAC said that it is considering placing its residential mortgage operations in a newly formed holding company to be named Residential Capital Corp.
That unit would seek its own credit ratings based on its debt and equity structure. Mortgage banking accounted for about half of GM's pretax earnings in the first nine months of 2004.
The move may be a prelude to selling the residential mortgage arm, perhaps in an initial public offering, said Nik Vasilakos, a bond analyst at Merganser Capital in Boston. GM has a history of selling off profitable units to generate cash, as it did with Electronic Data Systems Corp. (EDS.N: Quote, Profile, Research) in 1996.
But the move may also be designed to ensure GMAC's residential mortgage arm can still borrow money cost effectively if GMAC gets cut to junk, said Darin Feldman, a portfolio manager at Aladdin Capital in Stamford, Connecticut.
"Bond investors seem to take this as an admission that a downgrade is coming, but it's just a prudent measure to address a situation that is out of GMAC's hands. They can't control what the ratings agencies do," Feldman said.
GM bonds sold off relative to Treasuries on the news. Yield spreads, or the extra yield over Treasuries that investors demand for taking a company's credit risk, on GMAC's 6.75 percent notes due 2014 widened 0.04 percentage point to 2.79 percentage point. The bonds traded as much as 0.06 percentage points wider, according to MarketAxess.
The company's bonds widened about 0.01 percentage point more than Ford Motor Co's.
Meanwhile, shares of GM fell 64 cents, or 1.67 percent, to $37.75. Ford's shares fell 1.47 percent to $14.11.
posted by The Kid at 12:17 PM
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