GMAC -- Taking a Ten Year Risk

GMAC Inc. bond issue, General Motors Acceptance Corporation 7s of Sept. 15, 2021 sells for $955 as of April 19, 2011. That is a yield of 7.8% for about 10 years, 5 months. In this amount of time, the investor would get $45 bond appreciation plus $70 per year for 10 years plus $35 for 6 months. That is a total of $780 per bond.

For this amount of money, you, the investor will be taking some risk. The first risk is inflation risk. What is the risk that inflation will run above 8% in the next 10 years? If inflation runs above 8%, you will loose to inflation. Bankruptcy risk is a real factor since the bond S&P rating is only “B”. That is below investment grade but above the critical S&P “CCC” rating. As long as the company can pay, you, the investor will get your money.

According to Wikipedia, Ally Financial Inc., previously known as GMAC Inc., is a bank holding company headquartered in Detroit, Michigan, United States at Tower 200 of the Renaissance Center. With more than 15 million customers worldwide, Ally Financial provides a range of financial services including auto financing, insurance, mortgage services, and online banking.

In 2009, Ally employed 18,900 people. In 2008, the firm provided financing to 75 percent of the 6,450 GM dealers. On 24 December 2008, the Federal Reserve accepted then-GMAC's application to become a bank holding company. Ally returned to profitability in 2010, posting a net profit of $1.075 billion for the fiscal year. Ally plans an initial public stock offering in 2011.
As of 30 December 2009, approximately 14.9% of GMAC was owned by Cerberus Capital Management, 12.2 % by third party investors, 56.3% by the United States Treasury, 16.6% by General Motors (with 9.9% of that in a GM Trust).

The company's Global Automotive Services offer retail auto financing and leasing; dealer lines of credit for vehicle inventory, equipment or facilities; insurance coverages including retail vehicle service contracts and commercial insurance; and remarketing services through physical auctions and online services. Ally Financial also operates Ally Servicing (previously Semperian) within its Global Automotive Services division. Ally Servicing provides customer relationship management, servicing, and collection through several inbound call centers across the U.S.

Ally Financial's mortgage operations include Residential Capital, LLC (ResCap) and the mortgage activities of Ally Bank and ResMor Trust. Through these divisions, the company focuses primarily on the residential real estate market in the U.S. Business activities include the origination, purchase, servicing, sale and securitization of residential mortgage loans.

GMAC Home Services is the parent for GMAC Real Estate, formed by the purchase of Better Homes and Gardens Real Estate in 1998, and GHS Mortgage. Brookfield Residential Property Services purchased the GMAC Home Services business in September 2008. Brookfield is a wholly owned subsidiary of Brookfield Asset Management, a global asset manager located in Toronto, Canada.

Ally Financial's direct bank in the U.S., Ally Bank, offers savings products, including certificates of deposit (CDs), online savings accounts, interest checking accounts and money market accounts. ResMor Trust Company offers Ally-branded deposit products in Canada, including online savings, guaranteed investment certificates (GIC) and tax free products. Ally Bank and ResMor Trust Company are members of the FDIC and CDIC respectively.

However, the bonds talked about in this blog are not covered by FDIC or CDIC. Darnell L Williams does not own this issue but owns an issue that matures in 2018.