World markets take heart from GMAC's $6bn bailout

Treasury support means it is now 'highly unlikely' GM's auto arm will be liquidated

Sean Farrell,Financial Editor
Wednesday 31 December 2008 01:00 GMT
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GMAC, the US lender part-owned by General Motors, moved quickly yesterday to widen its lending and boost the country's stricken car industry after receiving a $6bn (£4.2bn) bailout from the federal government.

The news helped boost stock markets around the world on reassurance that the US federal government was prepared to take further action to support its troubled motor industry.

GM shares closed up 5.6 per cent in New York, having risen as much as 11 per cent at one stage. The Dow Jones Industrial Average closed up 2.2 per cent at 8,668.4, after a 1.7 per cent rise in the FTSE 100 to 4,392.7 and a 1.3 per cent jump in the Nikkei 225 index.

The US Treasury's support package comprises $5bn for an equity stake in GMAC and a $1bn loan to GM so that it can support GMAC's rights offer as part of its transformation into a bank holding company.

GMAC said it would provide financing for retail car and truck buyers with a score of 621 on the Fico credit-rating scale, just above what is considered sub-prime. GMAC had tightened lending criteria two months ago, restricting finance to those with 700 or more out of a maximum 850.

"The actions of the federal government to support GMAC are having an immediate and meaningful effect on our ability to provide credit to automotive customers," Bill Muir, GMAC's president, said. "Opening access to credit for those with scores of 621 or better will allow us to return to more normal levels of financing volume and should help in efforts to stabilise the US auto industry."

GM, whose brands include Chevrolet, Saab and Vauxhall, owns 49 per cent of GMAC. It sold a majority stake to the private equity firm Cerberus in 2006. GMAC is key to GM's survival because it has provided the bulk of finance to the car maker's retail customers and its failure would put GM at risk of losing up to 40 per cent of its US dealerships. Sales at GM, the world's biggest car maker until this year, plunged 41 per cent in November.

"Federal aid to GMAC suggests the government is probably now so financially entangled in the GM complex that a Chapter 7 liquidation of [GM's auto operations] seems highly unlikely," analysts at JP Morgan wrote in a note to investors.

Government support might also be extended to Delphi, GM's former parts maker, which is mired in bankruptcy, the analysts added.

US auto sales have plunged to 25-year lows due to the economic slowdown, outdated models and lack of credit for new purchases. They are not expected to recover before 2010. The collapse of GM, Chrysler and Ford would put millions of jobs under threat in the companies' supply chains, both in the US and overseas. GM employs 5,500 people in the UK.

GMAC is the latest non-bank financial company to qualify for help under the Treasury's $700bn Troubled Asset Relief Programme, which was originally conceived to buy illiquid securities from banks to free up inter-bank lending. The company has been shut out of credit markets, limiting its ability to lend for purchases and to finance vehicles on dealerships' lots until they are bought. The equity injection and loan come on top of up to $17.4bn that the government pledged on 19 December to help GM and Chrysler avoid possible bankruptcy. Cerberus also owns a majority stake in Chrysler.

GM also took advantage of the government's support to offer improved interest rates on 2008 and 2009 models, with many vehicles also carrying cash discounts.

The cost of insuring $10m of GMAC debt against default for five years fell to $1.6m upfront plus $500,000 a year, from $2.15m upfront. Credit default swaps for Ford's finance arm also fell.

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