When ResCap was hived off from GMAC it did so with the backing of $5 billion of 10-year subordinated debt. The goal was to pay back GMAC quickly, circa 2007 but in November 2005 ResCap identified that it would be able to pay back this debt in 2006. Some $3.6 billion of domestic debt was still owed.
But there are rules around how ResCap can pay back this debt. It can only downstream 50% of the funds raised from senior debt to pay back this subordinated debt.
“Investors’ expectation were slightly inflated. We changed people’s thinking on supply. We had to come up with a way to communicate that to the market,” says Louise Herrle, treasurer at ResCap.
ResCap, having built up some nine months of retained earnings and a $500 million reserve (a prepayment provision put in place when ResCap was created), had $1.3 billion of capacity that was not noticed by the market. That allowed ResCap to issue less debt than the market had expected it would to repay the sub debt to GMAC.