ResCap sends GMAC into red ink

Article by: CYNTHIA KOONS , Dow Jones News Service
Updated: April 29, 2008 - 7:44 PM

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GMAC's first-quarter losses illustrate how tightly the company is being choked by its Bloomington-based mortgage lending unit, Residential Capital.

That the broader economy is faltering adds to its woes.

ResCap reported net losses of $859 million -- less than last year's $910 million -- that factored in a $480 million gain from some debt retirement. It means ResCap could have lost $1.34 billion in the quarter.

The debt retirement, $1.2 billion at face value, is just one of several steps GMAC has taken recently to bolster the struggling mortgage lender. ResCap, once a major U.S. subprime mortgage originator, has been reporting losses for more than a year as a result of the blowup of the risky mortgage market and the subsequent credit crunch that has made securing debt of any kind prohibitive.

GMAC, co-owned by General Motors Corp. and Cerberus Capital Management, would not have posted a net loss in the first quarter had it not been accountable for ResCap. Monday, GMAC reported a first-quarter loss of $589 million, compared with a loss of $305 million a year ago.

In spite of GMAC's efforts to support ResCap, credit market investors continue to position for an eventual bankruptcy of the mortgage unit. Within the coming year, ResCap has about $4 billion of unsecured and $13 billion of secured debt coming due. The company now has a $4.2 billion cash cushion.

In its earnings release, ResCap said improvement in its domestic business was nearly offset by "significant deterioration" overseas that management blamed on global illiquidity. ResCap's total financing revenue of $1 billion in the quarter was offset by $1.1 billion in interest expenses. Executives said they had reduced ResCap's debt load, but that interest costs have risen.