• Update on the Emergency Economic Stabilization Act of 2008: United States Treasury Takes Action to Bolster GMAC LLC and General Motors Corporation
  • February 3, 2009
  • Law Firm: Seyfarth Shaw LLP - Chicago Office
  • On December 29, 2008, the United States Treasury (the “Treasury”) announced a two-part program to assist GMAC LLC (“GMAC”) and General Motors Corporation (“GM”). The Treasury’s announcement came ten days after it announced that it was making a $4 billion loan available to Chrysler Holding LLC (“Chrysler”) and a $13.4 billion loan available to GM. GMAC, a major source of automobile financing, has been on the verge of financial collapse1 as a result of the credit freeze, a weak automobile sales market and major losses incurred by its mortgage lending subsidiary, Residential Capital.

    For your convenience, set forth below is a summary of the most-recent actions taken by the Treasury with respect to GMAC and GM.

    Purchase of $5 Billion in Senior Preferred Equity from GMAC

    In exchange for preferred membership interests in GMAC that will pay cumulative distributions at a rate of 8% per annum (the “Preferred Interests”), the Treasury will invest $5 billion in GMAC. The $5 billion will come from the Troubled Asset Relief Program (the “TARP”) that was created under the Emergency Economic Stabilization Act of 2008 (the “Act”). The distributions shall be payable quarterly, in arrears, on February 15, May 15, August 15 and November 15 of each year.

    The Preferred Interests will be senior to common membership interests and pari passu with any other preferred membership interests, other than preferred membership interests which by their terms rank junior to any preferred membership interests. The Preferred Interests cannot be redeemed for a period of three (3) years from the date of the Treasury’s investment, except with proceeds from a Qualified Equity Offering2 which results in aggregate gross proceeds to GMAC of not less than 25% of the issue price of the Preferred Interests.

    So long as the Preferred Interests are outstanding, GMAC will be prohibited from declaring or paying distributions on (i) junior preferred membership interests, (ii) preferred membership interests ranking pari passu with the Preferred Interests and (iii) common membership interests. Further, so long as any of the Preferred Interests are outstanding, GMAC will be prohibited from redeeming or repurchasing any such interests unless unpaid distributions for all past distribution periods on the Preferred Interests are fully paid.

    The Preferred Interests shall be non-voting, other than class voting rights on matters that could adversely affect the Preferred Interests. If distributions on the Preferred Interests are not paid in full for six distribution periods (consecutive or otherwise), the Treasury will have the right to appoint two (2) managers to GMAC’s Board of Managers.

    GMAC also will issue warrants to the Treasury having an aggregate capital amount equal to five (5%) percent of the total Preferred Interests. The initial exercise price for the warrants shall be $.01 per share or such greater amount as GMAC’s limited liability company operating agreement may require as the capital amount per share of the warrants. The term of the warrants will be ten years and the Treasury will receive distributions at a rate of 9% per annum.

    The $5 billion investment by the Treasury in GMAC is part of the Capital Purchase Program3, the program under which the Treasury has and will continue to purchase billions of dollars of senior perpetual preferred shares from qualifying U.S. controlled banks, savings associations, and certain bank and savings and loan holding companies engaged only in financial activities.

    As a result of the Treasury’s investment, GMAC will have to comply with the executive compensation provisions set forth in Section 111(b) of the Act4.

    The Treasury’s $5 billion investment allows GMAC to convert into a bank holding company5. As a result of such conversion, GMAC will be able to borrow money from the Federal Reserve at low rates and, consequently, GMAC will be able to resume financing to a wider arrange of car buyers. Also, zero percent financing on vehicles will soon be offered.

    In order to convert into a bank holding company, certain holders of GMAC debt had to agree to convert approximately 75% of their bonds for stock and cash. And, on December 31, 2008, GMAC announced that it had met this requirement, confirming that holders of $21.1 billion of debt had agreed to swap their bonds for approximately $15.7 billion in cash and stock. These actions resulted in GMAC having approximately $30 billion of capital on hand.

    Further, as condition to the Treasury’s $5 billion investment, GM was required to reduce its stake in GMAC from 49% to less than 10% and Ceberus Capital Management LP (“Ceberus”), the private equity company that also owns Chrysler, was required to reduce its stake in GMAC from 51% to 33%. Ceberus’ stake will be distributed to its investors while GM’s stake will be transferred to an independent, government-accepted trustee who will sell off the equity in three years.

    $1 Billion Loan Facility for General Motors Corporation

    On December 29, 2008, the Treasury irrevocably committed to make a loan in the amount of $1 billion to GM. The loan is a single-draw, term loan to be used by GM to purchase Class B Membership Interests in GMAC (the “GMAC Equity”) pursuant to an offering made to the existing common membership interest holders of GMAC of approximately $1.25 billion.

    The collateral securing the $1 billion facility will consist of the GMAC Equity or “other collateral acceptable to the Treasury.” All loan documentation relating to the loan must be executed by January 16, 2009 and the facility matures on January 16, 2012.

    As a result of its acceptance of the loan proceeds, GM will have to comply with the executive compensation provisions set forth in Section 111(b) of the Act. Additionally, GM (i) shall be prohibited from paying or accruing any bonus or incentive compensation to its 25 most highly compensated employees, except as approved by the President’s Designee6, (ii) shall be required to maintain all suspensions or other restrictions of contributions to Benefit Plans7 that are in place or initiated as of the date of the Treasury’s loan to GM and (iii) shall be prohibited from adopting or maintaining any compensation plans that would encourage manipulation of GM’s reported earnings to enhance the compensation of any of its employees.

    Further, GM will have to demonstrate “to the satisfaction of the President’s Designee” that it is taking all reasonable steps to divest itself of any private passenger aircraft, or interest therein, owned or held by GM or any subsidiary immediately prior to the Closing Date.

    Additionally, GM shall provide “prompt notice” to the President’s Designee of any asset sale, investment, contract commitment or other transaction in excess of $100 million (not in the ordinary course of business) into which GM proposes to enter. The President’s Designee shall have the right to review and prohibit any such transaction if the President’s Designee determines that it would be inconsistent with, or detrimental to, the long term viability of GM.

    GM also shall implement a policy on corporate expenses (the “Expense Policy”) which shall, among other things, govern (i) the hosting, sponsorship or other payment for conferences and events, (ii) travel accommodations and expenditures, (iii) consulting arrangements with outside service providers, (iv) any new lease or acquisition of real estate, (v) expenses related to office or facility renovations or relocations and (vi) expenses relating to holiday parties and entertainment. The Expense Policy must comply with applicable laws, provide for internal reporting and oversight, contain mechanisms for addressing non-compliance and must be distributed to all GM employees and subsidiaries to the extent they are covered by such policy. The President’s Designee’s approval must be obtained for any “material deviations” from, or “material amendments” to, the Expense Policy.

    GM will be subject to strict reporting requirements including, among others, weekly status reports detailing the 13-week rolling cash forecast for GM and its subsidiaries as well as bi-weekly liquidity reports. GM will also have to provide monthly certifications regarding it compliance with the Expense Policy and the compliance of its Benefit Plans with Section 111(b) of the Act. The Treasury and the Special Inspector General under the Act shall have full access to the books and records of GM and each of its direct and indirect subsidiaries.

    Conclusion

    Over the past several weeks, the Treasury has taken significant actions aimed at bolstering GMAC and GM. As a result of the Treasury’s $5 billion investment in GMAC and its commitment to make a $1 billion loan to GM, the initial $350 billion of funds available under the TARP have been fully committed. The Treasury’s latest actions with respect to GM and GMAC will be among the last of the Treasury during the Bush Administration. As the Obama Administration takes office, we will continue to monitor events related to the Act and keep you apprised of any significant future developments.


    1 From July 1, 2007 through September 30, 2008, GMAC’s losses totaled approximately $7.9 billion.

    2 A Qualified Equity Offering is defined as a sale by GMAC of Tier 1 qualifying perpetual preferred membership interests or common membership interests for cash, other than a sale
    made pursuant to an agreement or financing plan that was entered into, or publically announced, on or prior to November 17, 2008

    3 Further details of the Capital Purchase Program may be found in this Firm’s publication, dated October 31, 2008 and entitled “Recent Developments Related to the Emergency Economic
    Stabilization Act of 2008.”

    4 Further details of the executive compensation requirements under the Act may be found in this Firm’s publication, dated October 17, 2008, entitled “Executive Summary of the Emergency
    Economic Stabilization Act of 2008” and this Firm’s publication, dated October 31, 2008, entitled “Recent Developments Related to the Emergency Economic Stabilization Act of
    2008.” Copies of these publications can be found on the Firm’s website, www.seyfarth.com. than a sale made pursuant to an agreement or financing plan that was entered into, or publically
    announced, on or prior to November 17, 2008.

    5 The American Express Corporation and CIT Financial recently received funds from the TARP and, like GMAC, converted to bank holding companies.

    6 The President’s Designee is defined as, “[O]ne or more officers from the Executive Branch designated by the President.”

    7 A Benefit Plan is defined as, “[C]ollectively, any compensation bonus, incentive and other benefit plans (including supplemental executive retirement plans), arrangements and agreements
    (including golden parachute, severance and employment agreements).”