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16 Jun 2008
Moody's downgrades GMAC to B3; outlook is negative
New York, June 16, 2008 -- Moody's Investors Service downgraded the senior long-term
rating of GMAC LLC to B3 from B2. The outlook is negative.
The downgrade is based on GMAC's increased exposure to Residential
Capital LLC, GMAC's residential mortgage finance subsidiary
(senior unsecured affirmed at Ca; see separate press release),
and also reflects growing pressure on GMAC's auto finance asset
quality and profitability.
GMAC and ResCap have recently concluded a restructuring of debt and bank
facilities that, while beneficial to ResCap's liquidity,
results in GMAC's committed credit extensions to ResCap increasing
to a total of $4.6 billion from $750 million at the
end of the first quarter of 2008. This includes a new $3.5
billion secured line, of which $750 million is a first loss
participation that is expected to be funded by GM and Cerberus (through
one of its managed funds). Extensions also include $1 billion
of incremental credit made necessary by a larger than previously anticipated
shortfall in ResCap's cash funding requirements. GMAC has
also contributed to ResCap certain ResCap debt that GMAC acquired through
open-market purchases, in exchange for ResCap preferred interests.
Moody's estimates that on a March 31, 2008 pro-forma
basis, common and preferred interests in ResCap and total credit
extensions represent 84% of GMAC's net worth, compared
with 46% at the end of 2007. Given the continuing operating
uncertainties at ResCap, the increase in exposure weakens GMAC's
stand-alone credit profile, in Moody's view.
GMAC's credit extensions are supported by a ResCap pledge of assets,
giving it a priority position in a ResCap bankruptcy; however,
Moody's believes there is some uncertainty regarding the extent
of asset recovery. GMAC's preferred interests in ResCap are
exchangeable after January 2009 for equivalent interests in IB Finance
Holding LLC, the parent of GMAC Bank, which provides financing
for both residential mortgages and auto loans. However, GMAC's
control of the bank past November 2008 is also subject to uncertainty,
as FIM Holdings (the investor consortium led by Cerberus) is party to
a disposition agreement with the FDIC that could result in Cerberus disposing
of its ownership interest in the bank by that date.
The downgrade also reflects growing pressure on the profitability of GMAC's
auto finance operations, arising from higher average borrowing costs
and weakening asset quality. Asset quality is being affected by
a marked decline in used vehicle values in recent quarters, which
decreases expected recoveries from loan defaults and reduces residual
realization on retail leases. In the last half of 2007, GMAC
tightened its loan underwriting, which resulted in improved delinquency
in the first quarter of 2008. Nevertheless, higher unemployment
and declining consumer credit alternatives are likely to result in higher
loan defaults in Moody's view.
The credit extensions and capital injections from GMAC to ResCap have
also increased the demands on GMAC's liquidity and capital ratios.
GMAC has obtained a new $11.4 billion three-year
senior secured bank facility that replaces its $6 billion unsecured
credit facilities. The facility steps down to $7.9
billion after two years. The new facility provides added funding
capacity to GMAC, but usage encumbers GMAC's assets,
resulting in structural subordination of senior unsecured creditors.
Moody's believes that asset coverage of unsecured creditors has
weakened in recent quarters. Moody's also said that GMAC's
leverage continues to be higher than auto captive peers.
The negative outlook on the GMAC rating reflects the continued operating
uncertainty at ResCap, as well as the challenging operating environment
for the core consumer auto finance operations.
GMAC LLC is a Detroit-based provider of retail and wholesale auto
financing, auto insurance, and warranty products. GMAC
owns Residential Capital LLC, which is engaged in residential mortgage
finance. GMAC reported a first quarter 2008 consolidated net loss
of $589 million.
Financial Institutions Group
Moody's Investors Service
Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
No Related Data.
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