Private equity players have plenty to worry about relative to current market conditions for leveraged buy-outs, but Cerberus Capital Managment LP's stake in GMAC Financial Services and associated ailing mortgage lender Residential Capital LLC is likely to be among the firm's more prominent migraines at present. The Wall Street Journal takes a look today at what sort of future might be in store for ResCap; at least one source speculated that Cerberus may be considering de-coupling the mortgage business from GMAC amid continued poor performance:
Yesterday, some long-term ResCap bonds traded near 60 cents on the dollar, down from 80 cents a month ago. The trading levels mark "a sign of doubt related to whether people are going to get their money," said Brad Rubin, automotive-credit analyst with BNP Paribas SA. He said the market will keep a close eye on GMAC's fourth-quarter performance for signs that ResCap could buckle under the weight of its subprime-loan exposure. "The question is if GMAC is going to cut ResCap loose," said Mr. Feltus, of Pioneer. ResCap "was a nice business when it's working, but right now, it's more of a black eye." ResCap has scaled back on subprime mortgages this year. Still, subprime loans accounted for 62% of its $59 billion in loan-held-for-investment portfolio as of Sept. 30.Subscribers can read the full story; I've taken the graphic showing funding volume and included it in this post (above). It probably goes without saying that Cerberus is getting heat behind closed doors from several hedge funds and others that lined up behind the GMAC deal when it was first made, many of whom now would seem to have a justified concern over ResCap's continued downward pull on the enterprise. GMAC so far, however, appears to be saying all the right things about its commitment to the mortgage business; it's also doing the right things, recently bringing in Bank of America Corp. executive Rob Hull to become its chief financial officer. Investors took the change as a signal that Cerberus isn't willing to give up just yet, according to the Journal.