Roddy Boyd tries to do some subprime math in the New York Post today, but I don’t quite follow his thread:
The subprime mortgage market collapse just might give private-equity titan Cerberus a headache for the forseeable future.
As the headlines mount about woes in the subprime sector, Park Avenue-based Cerberus’ 51 percent stake in GMAC – the owner of a massive subprime mortgage portfolio – is looking increasingly problematic.
With its GMAC stake, Cerberus also got one of the largest subprime players: a lender named ResCap Capital.
Cerberus, along with Citigroup and Aozora Bank, acquired the GMAC stake in November for $7.9 billion…
ResCap has $57 billion in subprime loans on its books as of Sept. 30, or a staggering 77 percent of a $73 billion portfolio…
Late last week, a Lehman Brothers analyst argued in a statement that GMAC* might have to reduce its book value by up to $950 million because of mortgage delinquencies.
If Cerberus’ consortium used standard financing, then the consortium likely put up around $1.58 billion in equity. If GM takes a write-down of $900 million to $950 million, Cerberus and its investors might have to write down up to $990 million – more than 50 percent of the initial equity investment.
Let’s say for the sake of argument that the Lehman report is spot-on. That would mean that probably the largest subprime portfolio in the world has total losses of less than $1 billion: big, to be sure, but hardly a systemic threat. After all, $950 million is just 1.3% of a $73 billion portfolio.
What I don’t understand is how a $950 million write-down at GMAC could correspond to a $990 million write-down for investors owning 51% of GMAC. Surely if they own half the company, they should take half the write-down? What am I missing here?
(Via)
*UPDATE: jck, in the comments, finds a CNBC piece which explains things: it’s GM, not GMAC, which is could see the $950 million write-down. So if GM, with 49%, writes down $950 million, then Cerberus, with 51%, could be forced to write down almost $990 million. Problem solved!
UPDATE 2: Murray, in the comments, has actually gone to the trouble of tracking down and, you know, reading the famous Lehman report. Go read his comment for the full skinny, but the upshot seems to be that (a) Cerberus’s downside is actually de minimis, and that (b) Roddy Boyd “Just. Doesn’t. Get. It.” So, basically, ignore the whole thing. GM might lose money on GMAC, Cerberus won’t.
In one sentence GM “takes a write-down of $900 million to $950 million” then it makes sense that Cerberus and its investors might have to write down up to $990 million,since GM as 49% and Cerberus et al 51%…but in another sentence GMAC “might have to reduce its book value by up to $950 million…”,in that case it doesn’t make sense…However another source appears to imply that the cash charge is to GM,if true then the $990m to Cerberus et al is correct.
http://www.cnbc.com/id/17405497/for/cnbc
Yeah, it’s not a bright piece. He gets the financing package completely wrong – Cerberus used nothing BUT equity to buy GMAC (and paid 20% below book at the time), and then forgets, as u point out, that they only own HALF the thing.
Nor is this a an exlusive – Lehman first put out a report 3 weeks ago on this, and it’s been covered in other papers. But on your first point, RB’s hardly arguing there’s a systemic problem here, so I’m not sure why you bring it up.
No, RB never talked about a systemic threat, it’s true. I just wanted to point out that subprime losses are really not that big. A write-down of 2.5% of assets should be within any financial company’s wherewithal.
FWIW, I don’t quite follow it myself. And this might just be me, but the article does seem in the vein of much of the breathless “sub-prime catastrophe” stories we’ve been seeing all too much of lately.
Re: the update. Problem not solved at all. In fact, RB is so bloody wrong it’s embarrassing:
1) RB states that LEH put out a research piece “late last week”. Er, the piece was published on Feb 15th, it’s been all over Marketwatch, etc. So, er, what exactly is RB’s exclusive?
2) RB gets the payment mechanics of the 51% sale to Cerberus totally wrong – the private equity firm paid nothing but equity and syndicated about $5.5bn of it to limited partners and others just before and after they announced the deal. No debt paid at all.
3) The terms of the sale, as LEH analyst Brian Johnson points out very clearly in his note, state that if GMAC’s book value at close (Nov 30th) falls below $14.4bn then GM has to “true up” the value.
In other words, GM has to make up the difference. So, if ResCap exposure to subprime from 1H06 is worsening, that means the book value used to calculate the sale price of parent GMAC will fall.
GM, and GM alone, must thus make up the difference. Rather than force Cerberus to pay up, this in fact means that it actually gets an even better price for the finance unit. Allow me to quote from the LEH report:
“GM may owe Cerberus cash in 1H07 if the book value of GMAC as of Nov. 30, 2006 was under $14.4 bil.” GM has 90 days to submit final closing report to Cerberus, which than has 30-60 days to mull over and object. GM has yet to file 4Q06 and FY06 financials, including closing sale report. Coincidence?
In other words, RB’s scoop is to tell NY’s financial community that he Just. Doesn’t. Get. It.
I remember the days when the post used to get real scoops…