Nov. 20 (Bloomberg) -- GMAC LLC, the largest lender to General Motors Corp. car dealers, applied for status as a bank holding company so it can get access to the Treasury’s $700 billion rescue fund for the financial industry.

The lender also began an exchange offer for $38 billion of notes issued by the company and its Residential Capital LLC home- lending unit to reduce outstanding debt levels, Detroit-based GMAC said today in a statement.

GMAC joins money-losing commercial lender CIT Group Inc. in trying to shore up its finances to gain bank status. That may help GMAC quell doubts about its survival after home foreclosures pressured the mortgage unit and GM’s auto sales plummeted to the worst level since 1945. GMAC may also be able to obtain U.S. government guarantees on new debt as a bank.

“If you let this many people participate, the benefit gets so diluted you haven’t done a lot of good,” said Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors. “You can’t save everybody. That’s the hard call.”

The debt restructuring is the second in five months for GMAC and ResCap as they try to stave off bankruptcy. GMAC has about $61 billion of unsecured long-term debt outstanding, according to a regulatory filing. The company has recorded total losses of $7.9 billion from mid-2007 through last quarter. Jennifer Zuccarelli, a Treasury spokeswoman, declined to comment.

Notes Gain

GMAC’s $2 billion of 7.25 percent notes due in 2011 fell 5 cents, or 11 percent, to 40 cents on the dollar at 4 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields about 58 percent, or 57 percentage points more than similar-maturity Treasuries, Trace data show.

ResCap’s $1.2 billion of 6.375 percent notes due in 2010 rose 3 cents to 10 cents on the dollar, according to Trace. The debt yields about 255 percent.

If the exchange offers aren’t completed by the end of the year, “there is a significant risk that GMAC will trigger a default under certain of its secured and unsecured funding and credit facilities,” the company said in a filing today.

GMAC has been shut out of some credit markets and last month said it might raise “significant amounts of capital” as part of an attempt to become a bank holding company and swap some of its debt. Standard & Poor’s said Nov. 7 that GMAC and ResCap were facing a “dire situation.”

S&P cut its rating today on the senior unsecured debt of GMAC and ResCap because the exchange will pay less than face value to some bondholders. GMAC was reduced to CC from CCC and ResCap’s notes were lowered to C from CC.

‘Increased Flexibility’

“As a bank holding company, GMAC would obtain increased flexibility and stability to fulfill its core mission of providing automotive and mortgage financing to consumers and businesses,” the statement said.

GMAC must raise $2 billion in capital from third parties or existing investors to qualify for bank status under the Tier 1 capital ratio, a measure of a lender’s ability to absorb losses, the filing said. The company said it was “in discussions” with the Federal Deposit Insurance Corp. about participation in its debt-guarantee program.

GMAC said it doesn’t expect to be able to participate immediately, and that “even if we become a bank holding company and consummate the offers, there can be no assurance that our request to participate” will be approved by the FDIC.

GMAC Swap

GMAC is offering to buy back notes for as little as 55 cents on the dollar in cash. Alternatively, holders can swap their debt for an equivalent amount of senior notes and preferred stock. ResCap holders will tender at a rate of as little as 20 cents on the dollar. The

Owners of GMAC notes can swap for a combination of new senior bonds with the same interest rate and maturity as their existing debt and new 5 percent perpetual senior preferred stock of a wholly owned subsidiary of GMAC. Preferred shares typically count as capital on a bank’s balance sheet. Holders can also opt for cash. Those owning notes maturing in 2031 will also get 8 percent subordinated notes due in 2018 as part of the exchange.

ResCap noteholders will get a combination of new senior and subordinated debt for as little as 50 cents on the dollar. If they choose the cash option, they’ll receive as little as 20 cents on the dollar. For ResCap’s 8.5 percent notes maturing in 2010, which were issued at as part of the exchange in June, holders would receive 75 cents on the dollar’s worth of newly issued 7.5 percent senior GMAC notes due in 2013 or 50 cents in cash.

SmartNotes

The debt exchange applies only to institutional investors, said GMAC spokeswoman Gina Proia. As of September, the company had $14.6 billion of outstanding SmartNotes, bonds that were sold to retail investors, and $3.9 billion of demand notes, according to today’s filing.

GM sold 51 percent of GMAC to a group led by buyout firm Cerberus Capital Management LP in 2006, retaining minority control. Democratic leaders in U.S. Congress today blocked immediate action on loans for automakers and ordered them to make a case for the aid next month.

More than 100 lenders, insurers and financial companies have applied to the government for at least $65.8 billion in funds through the Troubled Asset Relief Program, according to data compiled by Bloomberg. At least 57 received preliminary approval for $51.5 billion, while 48 more awaited word on requests totaling more than $14 billion.

CIT’s Plan

CIT said earlier this month it would sell shares and buy back debt to improve its ability to absorb losses in order to become a bank.

The Treasury’s $700 billion rescue plan for the financial industry, announced in October, includes $125 billion allocated to the nine largest U.S. banks and $125 billion originally earmarked for smaller regional lenders.

Some insurers and finance companies are planning to convert to banks to become eligible for the funds. Totals may be higher because disclosures of applications are voluntary, and some smaller institutions are omitted.

GMAC said earlier this month that it sold a reinsurance business to Maiden Holdings Ltd. and agreed to sell two insurance units to the firm as it seeks to avoid a cash squeeze.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.netCaroline Salas in New York at csalas1@bloomberg.net

Last Updated: November 20, 2008 17:17 EST