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GMAC Closer to Bank Status, But Hurdles Remain

NEW YORK (Reuters) - Sweetened terms on GMAC LLC's bond exchange offer makes it more likely the finance company will gain the support it needs to convert to a bank and gain access to government support needed to keep the company alive.

It's not a slam dunk, however. GMAC still needs to woo more bondholders than have currently agreed to the exchange, or find another way of raising the required capital.

The company's fate also depends on the survival of General Motors Corp (GM), which sells the cars GMAC finances, and GM's future depends on the U.S. government extending a loan analysts estimate may need to be as much as $30 billion.

GMAC's bonds jumped on Monday after the company said on Friday that holders of "a substantial portion of the outstanding notes" had agreed in principle to improved terms in its proposed debt exchange and that it extended the deadline for the offer.

Its 5.625 percent bond due 2009 surged 11.5 cents to 73 cents on the dollar, according to MarketAxess.

"It remains unclear whether this further sweetening of the exchange offers can move GMAC over the goal line as the company extended its early tender deadline for an extraordinary fourth time," CreditSights analysts Richard Hofmann and Adam Steer said in a report.

"That said, we would expect significantly improved momentum behind exchange offers on back of these latest changes, especially given that GMAC has also previously agreed to condition the exchange offer on achieving bank holding company status," they said.

GMAC is trying to swap $38 billion of debt for a smaller amount of debt, preferred stock and cash. The exchange would help it bolster its capital so it can become a bank and qualify for capital infusions from the U.S. Treasury Department's $700 billion bank rescue plan.

A committee of bondholders that had balked at the debt swap has agreed to the revised offer, but GMAC spokeswoman Gina Proia said the company still does not have the 75 percent of approvals required.

GMAC has said that if the debt exchange fails, it will withdraw its application to become a bank and explore other options.

"Every credit company is going to have to become a bank," said Dan Alpert, managing director at investment bank Westwood Capital in New York. "If you're trying to survive as a non-bank platform when everyone else is becoming a bank, you can't possibly compete in terms of costs of funds," he added.


Complicating GMAC's fate is the precarious position of GM, which is still waiting on government assistance needed for the company to continue operations and sell the cars backing GMAC's auto loans.

"We believe the company's ability to operate as a going concern likely requires an operating GM, whether in or out of bankruptcy," the CreditSights analysts said.

The Bush administration said on Friday it could be willing to provide emergency aid to the teetering U.S. auto industry, keeping open the prospects for a bailout a day after Congress failed to approve a deal.

Analysts say government help should be given to GM in bankruptcy, with debtor-in-possession loans, in order to be senior to GM's existing debtholders and have first claim on the automaker's assets.

"The alternative to attempt to legislate a senior position for the government outside of bankruptcy, as appeared in earlier versions of the auto bailout legislation, represents a violation of contract law, a dangerous precedent that all government interventions to date have sought to avoid," Bank of America analysts said in a report.

Westwood's Alpert views GM as too big to fail and says the government will likely support the company under bankruptcy protection.

"I think ultimately logical heads will prevail and they'll give a DIP, but they don't want to do this in a situation where they could lose all the money because they can't get their existing creditors to subordinate," he said.

(Additional reporting by Dena Aubin in New York; Editing by Dan Grebler)

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