"New York Post" reported yesterday that , “the subprime mortgage market collapse just might give private-equity titan Cerberus a headache for the foreseeable future.”
If the report is correct, it is not clear how this will affect the Bank of Israel’s decision on whether to grant the Cerberus Capital Management LP-Gabriel Capital Management consortium a control permit for Bank Leumi (TASE: LUMI). A decision is due this week. If the Bank of Israel decides to grant the consortium a control permit in principle, Cerberus will be able to undertake the necessary steps demanded by the regulator to obtain the permit by May 24. On this date, the consortium’s option to acquire an additional 10.1% of Bank Leumi will expire. After the expiry, Cerberus will not be able to put together a controlling core for the bank, and will have to reduce its holding to just 5%.
In an unusual move, Cerberus senior managing director Mark Neporent responded to the report, and told “Globes”, “We believe that the report in the “New York Post” will have no impact on the Bank of Israel’s decision on Cerberus, because the report is inaccurate and utterly wrong. Of course, this is only a belief, because we have no way of knowing how the Bank of Israel will decide.”
The “New York Post” wrote, “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.
“The deal seemed a masterstroke at the time: GMAC parent General Motors, reeling from troubles at its core auto unit, got billions in cash and dividends from the deal. Cerberus, meanwhile, scored what was seen as one of the crown jewels of the financial world, an asset that reliably threw off billions in cash and earnings.
“But ResCap could sharply reduce GMAC's luster. ResCap has $57 billion in subprime loans on its books as of September 30, or a staggering 77% of a $73 billion portfolio.”
The “New York Post” continued, “Wall Street, meanwhile, is waking up to ResCap's risks. 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.”
Sources familiar with the Cerberus-General Motors Company (NYSE:GM) deal told “Globes” that the report in the “New York Post” was full of errors and inaccuracies. The takeover of GMAC was not leveraged, but wholly equity-based, which means that all of the “New York Post’s” calculations about apparent losses by Cerberus are wrong. The sources added that, under the contract between General Motors and Cerberus and its partners, General Motors is responsible for all of Residential Capital LLC’s (ResCap) financial liabilities and losses through the end of 2006. They also claim that the proportion of subprime mortgages in ResCap’s portfolio was far lower than 77%. In addition, the subprime mortgages relate only to mortgages granted in 2006, when mortgage companies eased loan terms.
Published by Globes [online], Israel business news - www.globes.co.il - on March 6, 2007
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