ResCap Gets Cash Infusion

BANGALORE/NEW YORK (Reuters) – Residential Capital LLC said on Tuesday that parent GMAC LLC and private equity firm Cerberus Capital Management LP will inject more than $1.4 billion in cash, a move that highlights the struggling mortgage lender's efforts to stay solvent.

The money will come from asset sales and help ResCap plug a possible $2 billion cash shortage, more than triple the amount it said it needed a month ago, according to a U.S. Securities and Exchange Commission filing.

ResCap had estimated on May 5 that it needed to raise $600 million by June 30 to pay its debts. It said it now believes it might need the additional sum because “adverse” conditions left it unable to sell about $1.3 billion of assets.

“There is still the potential for bankruptcy (at ResCap), especially if GM and Cerberus get more hesitant about providing capital,” said Mirko Mikelic, a portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan.

Cerberus CBS.UL led a group in 2006 that paid General Motors Corp (GM.N: Quote, Profile, Research) $7.4 billion in cash for 51 percent of Detroit-based GMAC. GM owns the other 49 percent.

ResCap and Cerberus were not immediately available for further comment. Fifth Third owns GMAC debt, but not ResCap debt, Mikelic said.

Like many mortgage rivals, Minneapolis-based ResCap has struggled with mounting delinquencies and falling volumes and has essentially stopped making loans to people with poor credit.

“If ResCap can't restructure debt, it won't be a happy result,” said Brian Gevry, co-chief investment officer at Boyd Watterson Asset Management, which manages $3.2 billion in assets in Cleveland, Ohio. “The question is can they get it done fast enough? The answer for us is to step to the side and let that level of risk be taken by a hedge fund.” 

The lender has lost $5.3 billion in the prior six quarters and said in the filing that its liquidity problems could grow.

“There can be no assurance that ResCap's liquidity needs will not be greater or less than currently anticipated,” the company said. “If liquidity needs are greater, ResCap may be unable to independently satisfy its near-term liquidity requirements.”

ASSET SALES

According to the filing, Cerberus agreed to buy some ResCap assets for $225 million in cash plus a stake in a new company.

Cerberus also agreed to spend at least $950 million in cash to buy some mortgage-backed securities and mortgage loans, including some that are “non-performing,” the filing shows.

GMAC, meanwhile, agreed to buy a ResCap business that finances vacation resorts for a little more than $300 million in cash, dependent on the business's book value and debts, the filing shows.

In addition, GMAC agreed to increase the size of a credit facility for ResCap to $1.2 billion from $750 million. ResCap said it expected to borrow $450 million on June 3.

ResCap was the eighth-largest U.S. mortgage lender in 2007, according to newsletter Inside Mortgage Finance. It is the nation's largest mortgage lender not owned by a major bank, other than Countrywide Financial Corp (CFC.N: Quote, Profile, Research), which agreed in January to be acquired by Bank of America Corp (BAC.N: Quote, Profile, Research).

ResCap's 8.5 percent notes maturing in 2013 traded on Monday at about 44 cents on the dollar, yielding 32 percent, according to Trace, the Financial Industry Regulatory Authority bond pricing service. The level is considered “distressed.” 

GMAC's credit default swaps rose to 19 percent of the sum insured as an upfront payment, or $1.9 million to insure $10 million in debt for five years, plus annual premiums of 5 percent, according to Phoenix Partners Group. The swaps traded at 17.5 percent upfront on Monday.

By Jonathan Stempel and Walden Siew