GMAC may swap ResCap bonds for GMAC unit equity

NEW YORK (Reuters) - GMAC LLC on Friday said it may exchange bonds of its mortgage arm, Residential Capital LLC, for an equity stake in a GMAC unit as part of a debt exchange offer that expires later in the day.

The exchange, if it occurs, could result in some credit default swaps (CDS) insuring ResCap's debt moving to GMAC.

If this happens, holders of ResCap's debt that also bought protection on the debt with CDS that do not tender their bonds may be left with large mismatches in the value of the two securities.

As such the announcement may be designed to make the debtholders more likely to participate in GMAC's exchange, analysts said.

GMAC, owned by private equity firm Cerberus and General Motors Corp, is looking to swap $38 billion of outstanding debt for a smaller amount of new debt, as well as preferred shares and cash, in an effort to reduce its debt load and raise the capital it needs to qualify as a bank.

The Detroit-based company already has a banking unit that offers certificates of deposit and online savings accounts, but becoming a bank holding company would make it eligible for government support, including guarantees of new debt that it issues.

The company could also apply for billions of dollars of capital under the U.S. $700 billion Troubled Asset Relief Program.

As of Wednesday only 58 percent of bondholders had agreed to tender their debt, below the 75 percent GMAC has said it needs to go ahead with the exchange.

Reports have also surfaced that the exchange is in trouble. Pacific Investment Management (Pimco), the world's biggest bond fund, doesn't plan to participate in the exchange, The Wall Street Journal reported on Thursday.

BONDHOLDER PRESSURE

If the exchange does proceed, however, ResCap's old bonds will be swapped for an equity stake in IB Finance Holding Company LLC, the parent of GMAC Bank, GMAC said on Friday.

This could trigger a so-called "succession event" in credit default swaps insuring the mortgage lender's debt, which would radically alter the value of the contracts.

"It is a major stick," said Tim Backshall, chief strategist at Credit Derivatives Research. "It seems like a back-handed way to pressure these guys to take the deal."

"If bondholders had bought protection then this succession could drop the value of the protection and without the bonds following then the basis risk could be extremely high," he said.

Backshall added that instead of causing a succession the debt-for-equity exchange may instead constitute a restructuring under terms of the CDS contract, which would mean they would need to be paid out.

ResCap's five-year credit default swaps are trading at an upfront cost of around 73 percent the amount of debt insured, in addition to annual premiums of 5 percent, according to Markit Intraday.

That means it costs $7.3 million to insure $10 million of ResCap's debt for five years, in addition to annual payments of

$500,000.

GMAC's credit defaults swaps cost 46 percent upfront for five years, plus 5 percent annually, according to CMA DataVision.

(Reporting by Karen Brettell; Editing by Chizu Nomiyama)