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ResCap Scrambling to Survive

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The parent of Residential Capital LLC is scrambling to help the lender maintain required net worth covenants. Among possible moves are a sale of all or part of the company as well as the possible integration into a foreign mortgage lender that its parent is currently negotiating to acquire.

ResCap warned that its net worth, which was $6.2 billion on Sept. 30, may require a capital contribution as of Dec. 31, 2007 from parent GMAC Financial Services to maintain compliance with consolidated tangible net worth covenants contained in its credit facilities, according to a filing with the Securities and Exchange Commission Wednesday. Among its agreements with lenders, one requires ResCap to maintain a minimum consolidated tangible net worth of $5.4 billion.

While GMAC management plans to take steps to keep ResCap in compliance, “There can be no assurances, however, that GMAC’s board will authorize such a capital contribution or any other actions, or that such a capital contribution will actually be made.”

The Minneapolis-based company also said it commenced a cash tender offer for a series of notes with an aggregate principal balance of $3.5 billion due next year and in 2009 for between 50 cents and 83 cents on the dollar. ResCap will purchase up to $750 million.

During the period of tender offer, scheduled to expire on Dec. 19, GMAC may purchase other ResCap notes on the open market — presumably at a discount to face value, then contribute the notes to ResCap as a capital contribution and effectively enhance tangible net worth, the report said.

ResCap said GMAC is currently negotiating other strategic alternatives, including “potential acquisitions as well as dispositions, alliances, and joint ventures with a variety of third parties with respect to some or all of ResCap’s businesses.”

The lender and its parent are at varying stages of negotiation with the possible alternatives, including the execution of confidentiality agreements and preliminary due diligence, the filing indicated.

One alternative under consideration is the sale of certain parts of ResCap’s operations — though no deals have yet been struck.

Another strategic alternative on the table calls for GMAC to acquire a large foreign mortgage lender which ResCap could be integrated with, according to the filing.

“Other interested parties are actively pursuing the same acquisition and there can be no assurance that GMAC will be successful in consummating a transaction,” ResCap said.

One potential acquisition GMAC might be considering is the U.K.’s troubled Northern Rock Plc — which has garnered interest from a number of international institutions.

ResCap offered assurance on $38 billion in securitization trusts on its balance sheet, noting that in a worst case scenario, its exposure to the trusts is just $0.7 billion.

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