(Adds sale information in the fourth and fifth paragraphs.)
By Romy Varghese
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Troubled consumer lender GMAC LLC came to the debt market with a $2.9 billion offering of three-year bonds backed by the U.S. government Wednesday, according to people familiar with the deal.
GMAC is the only financial company with a junk credit rating receiving support under the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program. Moody's Investors Service has the company rated at Ca, two notches above default. The FDIC backing, however, means these bonds will be rated triple-A.
The offering came as GMAC asked the U.S. government for another $2.8 billion to $5.6 billion of fresh capital in the form of preferred stock, The Wall Street Journal reported Wednesday. The U.S. Treasury Dept. has already pumped $12.5 billion into the company, which lost $3.9 billion last quarter and is scheduled to post its third-quarter results soon.
The notes maturing October 2012 carried a coupon of 1.75%. They were priced at 99.991 to yield 1.753%, or 10 basis points below mid-swaps, according to one person familiar with the deal. In line with earlier talk, the notes offered a bit more compensation than comparable notes from Citigroup Inc. (C), said another person, while a third described the notes "coming as close to fair value as you can get."
In contrast, GMAC bonds that aren't backed by the government must pay steeper yields. The 6.875% bonds due 2012 yield 8.81%, according to KDP.
Bookrunners were Citi, RBS Securities Inc, Deutsche Bank (DB) and Morgan Stanley (MS). Market participants had anticipated demand for the deal.
Whatever GMAC's problems, people who buy these notes know that "ultimately, they're backed by the FDIC," said Michael Skinner, vice president of government and agency trading at broker-dealer Wall Street Access.
Thomas Ferguson, an analyst at KDP Investment Advisors, wrote in a note to clients, "Today's news is consistent with our view that the government will continue as a financial backstop for GMAC." He added: "GMAC's fundamentals notwithstanding, in Washington the company is viewed as an integral part of the U.S. auto industry's restructuring."
In addition, the guarantee program ends this week. Although eligible firms would be subsequently allowed to issue guaranteed debt in emergencies, a steep premium is expected to hobble such issuance. Meanwhile, investors continue to seek assets that are safe but offer more yield than short-term Treasurys.
GMAC converted to a bank holding company last year and is seen as crucial to the survival of Chrysler LLC and General Motors Co., both of which were shepherded into bankruptcy by the federal government earlier this year.
GMAC first got the go-ahead to sell cheaply priced debt insured by the FDIC on May 21. The FDIC backed $4.5 billion in GMAC-issued debt earlier this year. Wednesday's issue would complete the FDIC's $7.4 billion May authorization.
Unlike other banks, GMAC has been unable to fill the capital hole that was identified in the bank "stress tests" earlier this year. The company posted a second-quarter loss of $3.9 billion amid rising loan delinquencies and the continued U.S. auto slump. It expects to release third-quarter earnings next week.
"Clearly the markets remain rather unfriendly to unsecured debt issuance from somewhat distressed financial firms," said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott. "In those cases, the FDIC's TLG program remains a necessity to ensure continued access to the debt markets."
Meanwhile, junk bond investors are cheered by the signs of fresh support to the lender. The 6.875% bonds due 2012 gained 2.5 points to 95 cents, according to KDP.
-By Romy Varghese, Dow Jones Newswires; 215-656-8263; romy.varghese@dowjones.com
(Andrew Edwards and Kate Haywood contributed to this article.)