NEW YORK -- Residential Capital LLC, the beleaguered mortgage finance unit of GMAC, on Friday said it intends to restructure more than $12.8 billion of debt in a move analysts say will relieve short-term bankruptcy risk of the company.
"Assuming it goes according to plan, it eliminates the risk of default this year because it takes care of their problems with bond and loan maturities in 2008," said Justin Monteith, market analyst for high-yield research firm KDP Investment Advisors.
Concerns about ResCap's ongoing viability increased after the company said last month that the two independent members of its board who had been responsible for looking after the interest of ResCap's creditors had resigned.
The company has posted six consecutive quarterly losses due to the U.S. housing slump.
ResCap has around $5.2 billion in debt maturing this year, analysts at CreditSights said in a recent report.
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By extending its debt maturities ResCap is buying time to try to improve its operations, analysts said.
ResCap is proposing to swap five series of notes maturing in 2008 and 2009, totaling $3.32 billion, for new senior secured guaranteed notes due 2010, it said in a statement.
An exchange of nine series of notes maturing between 2010 and 2015, totaling $9.52 billion, for new junior secured guaranteed notes due 2015 is also being proposed.
BONDS SURGE
ResCap's bonds gained and its debt protection costs fell on the news.
Its 5.816 percent notes due in 2009 rose to 83 cents on the dollar on Friday, up from 68.75 cents on Thursday, according to MarketAxess.
The cost to insure ResCap's debt for five years with credit default swaps fell around 10 percentage points to around 38.5 percent upfront, or $3.85 million in a lump sum to insure $10 million in debt, plus annual payments of 500 basis points, said an analyst.
One-year debt protection costs plunged to around 20 percent the sum insured, or $2 million to insure $10 million in debt for one year, from more than 40 percent on Thursday.
Standard & Poor's and Fitch Ratings both cut their ratings on ResCap's debt, and said they expect to cut the debt to default as the offer will pay debtholders less than the par amount of their principal.
ResCap is offering to tender debt due between 2010 and 2015 for 80 cents on the dollar if tendered early in the process, which will drop to 77 cents if not tended early. The tender offer for debt maturing in 2008 and 2009 varies from 100 cents on the dollar to 80 cents.
"Although net-net it may feel like a credit positive for ResCap's liquidity/funding/solvency position, we fear that it has simply subordinated current senior debt holders even more," said Tim Backshall, chief derivatives strategist at Credit Derivatives Research in Walnut Creek, California.
Under terms of the offer, a portion of the notes may be redeemed for cash in a dutch auction tender, ResCap said. The company will have $700 million available for the notes maturing in 2008 and 2009 and $500 million for those maturing from 2010 to 2015.
The refinancing is contingent on ResCap arranging a new $3.5 billion credit line with GMAC, ResCap said. The two remain in negotiations over the proposed facility.
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