GMAC debt restructuring: Banks hobbled in workout deals

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Having negotiated away their covenant protection in the boom years, lenders find themselves in a weak negotiating position in the bust.

GMAC bondholders’ successful negotiation of improved terms on their $38 billion exchange and tender offer is a rare example of creditors being able to flex their muscles in today’s market. GMAC, desperate to achieve bank-holding status by boosting its regulatory capital to $30 billion, originally offered bondholders a split between a cash offer of as little as 55c on the dollar (capped at $2 billion) or new senior notes and 5% preferred GMAC stock.

Holders of its $4 billion existing 2031 notes were offered new subordinated debt of GMAC Bank. When only a little over 20% of GMAC notes were tendered by the original deadline, the offer was amended to 9% preferred stock and a $750 million contribution from GMAC’s existing shareholders (a group led by Cerberus Capital Management). By December 18 roughly 58% of the 75% of GMAC notes needed for the swap had been tendered.

GMAC’s creditors were in an unusually strong position as they were well aware how crucial the conversion of the lender into a bank holding company was to its survival (by enabling it to tap funds from the Troubled Assets Relief Program). But creditors of other distressed corporates are having a rougher time of it.

Borrowers know the pressure that the banks are under and how desperate they are to avoid crystallizing any losses. Private equity sponsors – which are not under the same kind of pressure as their hedge fund counterparts from investor redemptions – can also capitalize on their relatively strong liquidity position to demand concessions from the banks in return for pumping new equity into struggling firms.

In return for new equity Swedish private equity firm EQT has demanded the write-off of 35% of the senior debt and the entire second-lien tranche in the restructuring of bathroom fittings company Sanitec. Now when they sit around the workout table, banks might find that they are holding very few cards indeed.