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03 Apr 2006
MOODY'S LEAVES GMAC AND RESCAP RATINGS ON REVIEW
New York, April 03, 2006 -- Moody's Investors Service announced today that its review for possible
downgrade of General Motors Acceptance Corporation's Ba1 long-term
rating and Residential Capital Corporation's ("ResCap")
Baa3 long-term and Prime-3 short-term ratings will
continue. This follows General Motors's announcement that
it has entered into an agreement to sell a 51% stake in GMAC to
a consortium led by Cerberus, a large private equity and hedge fund
management firm. The transaction is currently targeted to close
in the fourth quarter of this year. The ratings of General Motors
Corporation (Corporate Family and senior unsecured at B3/negative outlook)
Moody's review will consider the benefits of the transaction to
GMAC's stand-alone credit profile, as well as to the
company's business, financial, and liquidity plans.
Moody's does not view the consortium as a "strategic"
investor in the context that it had set out in its prior commentary on
the potential sale transaction, and therefore no benefit from external
support accrues to the GMAC ratings as the result of the change in ownership.
As indicated by the review for possible downgrade, Moody's
believes that at the closing of the sale, the best-case rating
outcome would be a confirmation of the current GMAC ratings at Ba1.
This would reflect a more positive view on GMAC's stand-alone
credit profile. Moody's also believes that, based upon
its current view of GMAC's stand-alone credit profile,
the most likely downside case for the GMAC rating would be Ba2.
Moody's said that execution risks associated with consummating the
sale, as well as continued uncertainties at GM that could impact
GMAC's credit profile, warrant a continuation of the review
through closing. If the sale does not close, Moody's
would re-link GMAC's rating with GM's rating,
which would most likely result in the assignment of a Ba3 long-term
rating to GMAC, barring further deterioration to its credit profile
resulting from internal issues or additional GM stress.
Moody's believes that aspects of the sale transaction have positive
implications for GMAC's stand-alone credit profile,
currently equivalent to a mid-Ba rating. A reduction in
GMAC's unsecured direct exposure to GM, and a potential strengthening
of GMAC's liquidity and funding profile represent the most immediate
potential benefits to the stand-alone view. Furthermore,
Moody's believes the transfer of board control to Cerberus enhances
the control and governance environment at GMAC to a sufficient degree
as to result in de-linkage of GMAC's ratings from GM's
ratings upon closing. However, Moody's expects that
GMAC's business relationship with GM will continue to be the cornerstone
of its business model under new ownership. Thus, GMAC will
continue to be exposed, both directly and indirectly, to conditions
at GM. In Moody's view, therefore, it is unlikely
that GMAC's ratings could rise to the investment grade level until
GM's credit profile stabilizes or even improves.
Moody's also said that GM's call option on GMAC's auto
financing operations places limitations on GMAC's future rating.
Under terms of the agreements, GM may exercise its call option on
GMAC's auto financing operations if GM achieves an investment-grade
rating (Baa3). Were the call option to be exercised, GMAC's
rating would be closely aligned with GM's rating. GMAC's
rating under the new ownership structure could therefore rise no higher
than Baa2, one-notch above the lowest investment-grade
rating - the rating at which GM may exercise its call option.
Moody's noted that at closing, GMAC's unsecured direct
exposure to GM is anticipated to decline to $400 million,
with aggregate exposure going forward capped at $1.5 billion,
due to the elimination of inter-company credit lines, a restructuring
of lease residual support payments, and the refinancing of other
inter-company funding and business arrangements. In addition,
according to the transaction terms, GM will retain a $20
billion portfolio of retail lease and installment loan assets (much of
which is securitized) with a book value of approximately $4 billion.
Moody's said the reduction of these exposures (though the lease
book will rebuild) would reduce the firm's vulnerability to a GM
bankruptcy. Moody's would not expect GMAC to be forced into
bankruptcy as a direct result of a GM filing.
A strengthening of GMAC's liquidity profile would also be viewed
as a credit positive. To this end, Moody's notes that
Citibank has committed to provide to GMAC a new $25 billion secured
borrowing facility that GMAC will be able to access to fund less-liquid
assets, including commercial finance assets and auto leases.
Though this facility is not part of the sale transaction, Moody's
will evaluate the structure's potential to create new funding alternatives
for GMAC's more difficult to finance asset classes. Moody's
also said that it will balance the positive liquidity benefits provided
by such a facility with the rising levels of secured debt in GMAC's
capital structure, and consider its effect on the structural subordination
and recovery prospects for GMAC's unsecured creditors.
Moody's review of ResCap's ratings continues to focus on any further
accounting or control issues, the company's continued efforts
to extinguish its inter-company debt with GMAC, and the final
closing of GM's sale of GMAC to a group led by Cerberus.
Moody's also stated that, assuming the sale of GMAC closes
as planned, key credit drivers for ResCap's rating will include
1) ResCap's efforts to strengthen its accounting and other operational
and financial controls, and the control culture in which those policies
are applied, 2) ResCap's evolving strategic direction,
focusing on the relative speed and development of its various business
lines and its international expansion, 3) further integration of
the company's business lines, which until recently have been
operating autonomously, and 4) ResCap's evolving financing
structure, with a focus on the company's capital structure,
leverage and liquidity risk.
Furthermore, Moody's stated that even if the sale of GMAC
does not close, it would most likely maintain the current Baa3 and
Prime-3 ratings of ResCap. This rating action would reflect
Moody's expectation that ResCap would likely be sold on its own
if the GMAC sale efforts are abandoned.
GMAC, wholly-owned by 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.
GMAC reported 2005 earnings of $2.4 billion.
ResCap is a holding company for the real estate financing businesses of
GM, including GMAC-RFC Holding and GMAC Residential Holding
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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