ResCap May Need Even More Cash

ResCap began its $14 billion debt exchange or buy back today to help improve its liquidity position, which is looking bleaker by the day. As I mentioned in my earlier post on ResCap, the company is seeking a new $3.5 billion credit line from its parent GMAC to finance the debt restructuring. Additionally ResCap wants GMAC to contribute $350 million of ResCap notes outstanding by the end of the month and give it $150 million more in borrowings under an existing credit facility. The mortgage lender is asking alot from its parent GMAC, whose own financial prospects have been greatly harmed by the residential mortgage lender's abominable financial performance. I think I once asked for a $20 credit line increase from my parents, and they scoffed at me. And I'm fairly certain I've never punted billions of dollars of their money.

ResCap goes on to say that it will need to enact assets sales or other capital generating actions in order to provide additional cash of $600 million by June 30th. This news prompted me to dig up GMAC's 8-K released on April 29th. One interesting tidbit in GMAC's earnings announcement stuck out at me that hadn't received much attention in the financial press. ResCap reported a 2008 first quarter loss of $859 million, which looked positively rosy compared to the $910 million loss posted in the first quarter of 2007. However, the losses would have actually been much larger had ResCap not bought back $1.2 billion of its own debt at a discount, which boosted its earnings by $480 million. Without it, ResCap would've posted a loss of $1.339 billion. Furthermore, GMAC's loss would've ballooned to $1.069 billion. You've got to love a company experiencing major liquidity problems that is attempting to boost its own earnings by wasting precious cash to buy back its own distressed debt. Whether this new $14 billion debt buyback scheme will actually keep ResCap solvent remains to be seen. My guess is the money could have been better spent investing in the actual operations of the firm. But I'm sure the financial geniuses at Cerberus would never stoop to such an old-school, unsophisticated solution to a major financial blow-up.