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17 Oct 2005
MOODY'S CHANGES REVIEW OF GMAC'S LONG-TERM RATINGS TO "DIRECTION UNCERTAIN"; GM RATINGS REMAIN UNDER REVEIW FOR POSSIBLE DOWNGRADE
New York, October 17, 2005 -- Moody's announced today a change in the review status of GMAC's
long-term debt ratings to "direction uncertain" from
"review for possible downgrade." GMAC's long-term
ratings had been placed under review on October 10, 2005.
Moody's is also placing GMAC's Not-Prime short-term
rating on review for possible upgrade. These rating actions are
a consequence of GM's announcement that it will seek to sell a controlling
stake in GMAC to a strategic partner. GM's Ba2 long-term
ratings remain under review for possible downgrade.
In Moody's view, partial ownership of GMAC by a third party
has the potential to enhance the degree of separation between the GM and
GMAC ratings. This is possible, Moody's said,
if the ownership change results in GMAC's governance structures
being made more independent of GM's, if the potential partner
is of sufficient financial and managerial strength, and if its interests
are sufficiently aligned as to be complementary to GMAC's core auto
and mortgage franchises. However, the ratings benefit could
be minimal if, in Moody's view, these conditions are
not adequately met. Additionally, Moody's noted that
there is sizeable execution risk associated with such a transaction.
In the course of conducting its ratings analysis, Moody's
has come to the view that GMAC's stand-alone credit profile
would likely warrant a low-Baa long-term rating.
This opinion is based upon GMAC's intrinsic qualities, setting
aside considerations related to its ownership by GM. For GMAC's
public debt ratings to fully converge with its stand-alone credit
profile, Moody's believes that GM would be required to relinquish
both majority ownership and majority control of GMAC to a satisfactory
unrelated party. Inclusion of a partner in the ownership structure
potentially strengthens the case for ratings separation if the partner
already possesses auto financing operations, which makes the strategic
nature of the tie-up more compelling, and in addition,
is a large financial institution with a credit profile superior to that
of GMAC's. Were such a partner to also demonstrate an ability
and willingness to provide meaningful financial support to the enterprise,
ratings could be strengthened further.
Moody's believes that a sale of a controlling interest in GMAC is
likely to significantly reduce the annual dividend paid to GM.
This dividend currently approximates $2 billion per year and,
in the rating agency's view, is a critical factor in moderating
the automotive operation's large rate of cash consumption which
is likely to approximate $4 billion during 2005. The key
issue in Moody's assessment of the impact of a GMAC sale on the
credit quality of GM will be the diminution in the level of dividend received,
balanced against the amount and use of proceeds from the sale.
Use of proceeds could include a material reduction in debt, an increase
in gross liquidity, or increased distributions to GM shareholders.
Other factors that will be considered include GMAC's ability to
continue providing adequate support for the financing of GM's retail
and wholesale operations, and the potential for increased value
in the retained GMAC investment over the long term.
Moody's believes that announcement of a tentative agreement between
GM and the UAW to significantly reduce the company's healthcare
costs is constructive. However, GM continues to face considerable
challenges that will remain a focus of the rating agency's review.
These include: managing the potential risks resulting from the Delphi
bankruptcy; stemming the decline in North American market share;
reducing employment levels and capacity to better match its sustainable
North American market share position; contending with the shift in
consumer preference from SUVs toward smaller, more fuel efficient
vehicles; achieving adequate consumer acceptance for the critical
T900 truck and SUV product launch; and, reducing its dependence
on price incentives to prop up its sagging US share position.
Moody's view of GMAC's stand-alone low-Baa credit
profile is supported by GMAC's capable risk management discipline,
which functions relatively independently of GM. GMAC's asset
quality has been very good historically, contributing to relatively
stable operating performance in its financing operations and mortgage
segments. Deterioration in the rate of auto loan net charge-offs
during the last credit cycle, and improvements since, have
been largely a function of loss severity associated with changes in the
price of remarketed vehicles after repossession or lease termination.
However, GMAC's significant concentration in GM vehicles is
a key ratings constraint even on a stand-alone basis, as
its credit metrics could worsen should demand for GM vehicles decline,
leading to higher portfolio loss severity.
GMAC has also demonstrated strength in liquidity management, anticipating
funding needs and preparing for contingencies in advance of GM's
credit weakening. However, recent downgrades related to parent
company stresses have negatively impacted GMAC's access to the unsecured
debt markets, its primary source of funding, making the task
of providing adequate liquidity more challenging. GMAC management
has turned to greater use of alternative funding sources, notably
securitization and whole loan sales, to help ease this constraint.
In 1H'05, GMAC's acquisition of new finance assets slowed
partially as a function of changes in GM's marketing programs,
further relieving some liquidity pressure. In Moody's view,
GMAC's committed borrowing facilities, in combination with substantial
cash balances, cash flow from its short-duration auto finance
assets and its access to the ABS markets, provide sound sources
of alternative liquidity for its short-term obligations.
Its mortgage subsidiaries also have unsurpassed access to the MBS markets.
In Moody's view, factors limiting GMAC's intrinsic credit
profile include its significant business and financial concentrations
with parent GM. GMAC's direct net exposure to GM at 6/30/05
was approximately $4.8 billion, or 21% of book
net worth. GMAC also makes available to GM a $4 billion
line of credit. Furthermore, GMAC sources nearly all of its
non-mortgage originations through its relationship with GM's
dealer and retail base. As a result, GMAC's origination
volumes, asset quality, and earnings are sensitive to conditions
at GM. GM's Ba2 ratings are under review for possible downgrade,
reflecting continuing operating and competitive challenges. In
Moody's view, GMAC's business and financial concentrations
with GM suggest that a further deterioration in GM's rating could
lead to downward pressure on GMAC's stand-alone credit profile,
though the two do not necessarily move in unison.
GMAC's stand-alone profile is further constrained by profitability
metrics that have historically been weaker than peers and are under pressure
due to rising interest rates. If GMAC's origination volumes
decline further, operating costs could cut into margins unless the
company adjusts the scale of its operations in an effective and timely
manner. Moody's also believes GMAC's financial leverage
is high, which limits the firm's financial flexibility.
To conclude its review of GMAC's ratings, Moody's will
need further information regarding GM's plans, including the
identity of the potential partner and detail regarding the governance
and business strategy of GMAC under the revised ownership. Additionally,
given the aforementioned execution risk related to the transaction,
Moody's would need to believe that there is a high degree of certainty
the transaction would be completed.
GMAC, a wholly-owned subsidiary of GM, provides retail
and wholesale financing in support of GM's automotive operations and is
one of the world's largest non-bank financial institutions.
It reported earnings of $1.5 billion and assets of $309
billion at 6/30/05.
Financial Institutions Group
Moody's Investors Service
Mark L. Wasden
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
No Related Data.
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