(Bloomberg) – GMAC Inc., the money-losing lender labeled too big to fail by the U.S., has used government guarantees to slash its borrowing costs and undercut profitable lenders, lifting its bond prices by 80 percent since March.

GMAC sold $3.5 billion of federally backed bonds in June at a 2.2 percent yield, 65 percent below its average borrowing costs in the first quarter. GMAC’s bank, renamed Ally in May, cut the rate it pays on 12-month certificates of deposit by half in the past year to 2 percent.
The lender reports second-quarter results tomorrow following losses in six of the past seven periods. The Detroit- based firm, which took $13.5 billion in U.S. bailout funds, turned to cheaper government financing after 20 months of declining auto sales and rising credit losses from soured mortgages hurt its ability to line up private investments.

“The only levers you can really pull are reducing your overall costs and hopefully improving your cost of funds,” said Christopher Wolfe, an analyst at Fitch Ratings in New York. “It has to be material and is obviously an enormous help to the company in the longer term.”

GMAC’s average worldwide cost of borrowing has been above 5 percent since 2005 when the three biggest credit rating companies cut its debt to junk because then-owner General Motors Corp. was losing market share to Asian competitors. Funding costs peaked at 6.53 percent in the fourth quarter of 2008 before slipping to 6.21 percent in the period ended March, according to company filings.

To tap the Treasury’s bailout program, GMAC was permitted to become a bank holding company in December and has since received two rounds of government funds as part of a plan to save GM and Chrysler Group LLC. The Treasury now has a 35 percent stake in GMAC.

Ward of State

“They’re a ward of the state,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, which upgraded the debt six levels to B- in May because of the bailout. “As long as they can keep the federal government’s support in place, they’ll be in fine shape.”

GMAC’s 8 percent notes maturing in 2031 have climbed 82 percent since the end of March. They traded on July 23 at 72 cents on the dollar, to yield 11.5 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. GMAC doesn’t have publicly traded shares.

GMAC’s $4.5 billion debt sale in June, which included $1 billion of floating-rate notes, marked the first time the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program backed a junk-rated company. It was GMAC’s first dollar- denominated benchmark offering since a $2 billion sale in 2007, when it sold five-year bonds with a 6.625 percent coupon.

FDIC Backing

The 2.2 percent yield on the FDIC-backed notes is less than companies such as BB&T Corp. and Ford Motor Co. are paying on debt issues. BB&T, based in Winston, Salem, North Carolina, sold $1 billion of three-year senior unsecured notes last month at 3.85 percent after repaying its government funds. Dearborn, Michigan-based Ford, the only major U.S. automaker to forgo federal aid, last week sold through its financing arm $1.75 billion of three-year bonds at 7.5 percent, more than triple GMAC’s rate.

CIT Group Inc. is trying to avert bankruptcy after the FDIC refused to guarantee the commercial lender’s debt. The New York- based company turned to bondholders for a $3 billion rescue after failing to get a second government bailout.

“It’s a tough game when the government helps out particular companies and industries,” said Mirko Mikelic, who helps manage $19 billion at Fifth Third Asset Management. For GMAC, “it’s a huge gain that goes right down to the bottom line,” he said.

Added Deposits

GMAC is counting on added deposits at Ally Bank to help fund lending. In May it received an exemption from the Federal Reserve allowing the bank to originate a limited amount of GM- related retail and wholesale assets. The bank’s 2 percent CDs, while less than half the 4.05 percent yield a year ago, are among the highest in the country, according to Bankrate.com. CD rates fluctuate as interest rates rise and fall.

GMAC renamed Ally Bank in May and boosted advertising to attract customers. Television ads criticize competitors for hiding rate increases and say there’s “nothing buried in the fine print” at Ally. GMAC’s deposits in the first quarter rose 17 percent from the previous period to $23.2 billion.

“The business model for GMAC is shifting to become increasingly more reliant on bank funding,” said Gina Proia, a company spokeswoman. “In making the brand transition, we executed several activities including the ad campaign to let customers know what this bank stands for.”

Lower Rates

GMAC has also lowered rates it pays on so-called demand notes, unsecured bonds that are sold to “eligible members of the GM/GMAC family,” according to its Web site. The bonds carry an annual yield of 2.25 percent, down from 5.25 percent in November, before the bailout. The lender has been able to lower rates across the board because of the implied backing of the U.S., according to Fifth Third’s Mikelic.

“The government showed their hand,” Mikelic said. “They are going to protect this company and protect the industry.”