WASHINGTON (Reuters) -- The U.S. Treasury Department will likely exit its investment in GMAC Financial Services this year through a gradual sale of shares following a public offering, two senior Treasury officials said today.
The auto finance giant is now capitalized at levels well above historical industry averages, said Ron Bloom, senior advisor to Treasury Secretary Timothy Geithner, and Jim Millstein, chief restructuring officer at the Treasury Department in written testimony before the Congressional Oversight Panel.
"GMAC is now able to secure funding for its ongoing operations, a critical step toward independence," the two officials said.
The government now holds 56.3 percent of GMAC's common equity as the result of several capital infusions that totaled more than $17 billion.
GMAC raised $2 billion in unsecured debt this month on terms comparable to a recent financing completed by Ford Motor Credit, the finance arm of Ford Motor Co. -- a transaction considered a critical step toward eventual independence.
Selling debt before stock
Millstein said he "certainly hoped" that GMAC would not need any more government financing, but the Treasury could convert preferred shares to common equity -- a higher quality form of financial capital -- if necessary.
A key test will be GMAC's ability to refinance maturing debt, he said.
"The first path toward an exit (of the government stake) requires refinancing balance sheet, and creating a longer runway of liquidity," Millstein said.
"We think that given progress the company has made, the most likely path to facilitate an exit is for an IPO to occur. It's hard to know what the market conditions will be, whether they will be favorable, but my guess is that we're looking at some time at least a year out," he added.
Millstein said the Treasury also may convert some of its preferred shares to common stock to sell in an IPO or afterward to reduce the taxpayers' stake.
GMAC CEO Michael Carpenter, who took over in November as the company negotiated with the Treasury for additional capital, said the firm would not be able to sell $17 billion worth of shares all at once but said a modest IPO could probably be achieved in the next year or two. He added that it was unlikely that GMAC would require more capital from Treasury.
Bloom and Millstein said in their prepared remarks that the Treasury in April would name two members to the GMAC board of directors, to a total of four selected by the government.
They also said the Treasury would end in April its automotive supplier support program, which was previously scaled back to $3.5 billion from an initial $5 billion. The program was put in place to support the industry's supplier base during the bankruptcies of automakers GM and Chrysler last year.
The Treasury officials were questioned by the members of the panel as to why they decided not to put GMAC into bankruptcy along with General Motors and Chrysler, the two car companies for which it provided financing.
Bloom said this would have been costly, with estimates of debtor-in-possession financing running as high as $40 billion to $50 billion, because all of the firm's credit lines would have been cut off by a Chapter 11 bankruptcy reorganization. It also could have threatened the GM and Chrysler bankruptcies by depriving financing from car buyers.