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Rating Action:

Moody's upgrades Ally Financial senior unsecured to B1, ResCap to Ca

07 Feb 2011

New York, February 07, 2011 -- Moody's Investors Service upgraded the issuer and senior unsecured ratings of Ally Financial Inc. and its supported subsidiaries to B1 from B3. Concurrently, Moody's upgraded the senior secured (second lien) and senior unsecured ratings of mortgage finance subsidiary Residential Capital LLC to Caa3 and Ca, respectively, from C. The rating outlook for both Ally and ResCap is stable.

RATINGS RATIONALE

The Ally and ResCap upgrades reflect a decline in ResCap's exposure to portfolio under-performance and mortgage repurchase risks and an associated decrease in contingent risks to Ally relating to its support of ResCap. Additional factors supporting Ally's upgrade include its strengthened liquidity and capital positions and prospects for continued profitability in its core auto finance and mortgage businesses based upon positive asset quality performance trends.

During 2010, ResCap sold its UK and European mortgage operations, reducing assets and related contingent exposures by $11 billion. The company also sold $2.5 billion of other legacy mortgages during the year. Notably, the asset sales generated modest gains versus book values that had been aggressively written down during the fourth quarter of 2009. ResCap also reached settlements with Fannie Mae and Freddie Mac with respect to representation and warranty related mortgage repurchase exposure, capping repurchase expenditures on a significant proportion of ResCap's originated portfolio at $1.4 billion, the amount of repurchases and reserves recognized by ResCap on these portfolios from 2008 through the end of 2010. In stark contrast to prior periods, ResCap was profitable in each quarter of 2010 and required no additional support from Ally to repay maturing debt and maintain covenant compliance under its bank facilities. Near-term demands on ResCap's capital and liquidity resources should be manageable, given the magnitude of the company's risk reductions, its positive earnings, its modest 2011-2012 debt maturities, and its borrowing availability under a credit line from Ally.

However, Moody's believes that ResCap's intrinsic credit profile remains weak because of the longer-term risks to its liquidity from mortgage underperformance, mortgage repurchases, and higher debt maturities after 2012. ResCap's non-agency repurchase requests trended downward during 2010, but the company continues to be exposed to potentially significant private-label mortgage repurchases that over time could exceed its year-end repurchase reserves of approximately $830 million. An unexpected ramp-up in mortgage repurchases would also increase the burden on ResCap's already compressed cash flow.

"We believe that ResCap will require the continued support of its parent Ally to repay its obligations in a timely manner," said Moody's senior analyst Mark Wasden.

ResCap's ratings incorporate Moody's expectation that Ally will continue to extend support to ResCap as it pursues further reductions in legacy portfolio risks. Ally's history of capital injections and loan extensions to ResCap over the past several years and the importance of ResCap's origination and servicing platforms to Ally's ongoing mortgage business favor an expectation of continued support by Ally. Moody's anticipates that Ally will renew its $1.6 billion line of credit to ResCap, together with a separate amortizing credit facility of about $1 billion, when the agreements mature in April 2011. As a consequence of risk reductions already achieved, Moody's estimates that additional capital support that could potentially be needed by ResCap, beyond existing borrowing availability from Ally, would likely be manageable within the context of Ally's total capital position. Nevertheless, Ally's support is not certain, particularly if ResCap's risk exposures were to materially escalate. As a result, Moody's does not equalize the senior ratings of ResCap with those of its parent.

Ally's upgrade is supported by improvements to its capital position. The US Treasury's December 2010 conversion of $5.5 billion of its $11.4 billion holdings of Ally's mandatorily convertible preferred securities (MCP) increased Ally's common equity, strengthening its buffer against unanticipated demands on its capital resources, including from ResCap. Ally's measures of capital adequacy are now well positioned in comparison to traditional banks, with its Tier 1 common ratio increasing to 8.6% at the end of 2010, up from 5.3% the prior quarter. However, Moody's believes that Ally's business concentrations expose the firm to elevated performance volatility during periods of instability in the U.S. domestic auto and housing sectors. In Moody's view, for Ally to maintain capital levels that are commensurate with its risk concentrations, it must continue to exhibit capital measures that are among the strongest of U.S. financial institutions. A shift to higher leverage would be limiting to Ally's ratings.

The MCP conversion also increased Ally's operating and financial flexibility. Because GM's ownership in Ally was diluted to less than 10%, the Federal Reserve no longer considers Ally Bank and GM as affiliates under sections 23A and B of the Federal Reserve Act, thereby eliminating the volume limitations on GM-related receivables originated by Ally Bank. Ally should be able to make greater use of low-cost deposits to fund its receivables, in lieu of higher cost alternatives, which could aid its net interest margin. Ally will also save about $500 million annually from lower MCP dividends, paid at a 9% rate, thus further improving its cost of capital. Moody's believes that these opportunities and funding cost benefits strengthen Ally's business proposition and could translate into improved access to both debt and equity capital, with additional follow-on benefits to funding costs, profitability, and liquidity.

With respect to liquidity, Ally demonstrated improved market access in 2010 by raising $8 billion of unsecured debt in addition to multiple ABS transactions and credit facility renewals. With Ally's gradual transition to a bank funding model, a higher proportion of new loans are funded in Ally Bank, which grew its deposit base by $7 billion in 2010. By the end of the year, deposits represented 31% of Ally's total interest-bearing funding, up from 25% at the close of 2009. Ally has demonstrated high retention of its primarily time deposits, notwithstanding offered rates that are generally comparable to other banks. During 2010, Ally Bank also had good access to ABS investors and it maintains capacity under secured credit lines.

However, Ally's non-bank operations remain highly reliant upon confidence-sensitive wholesale sources of funding, which constrains the firm's credit profile. Ally's unsecured debt maturities increase in 2011 to $9.5 billion and to $11.6 billion in 2012 before declining to more manageable levels in subsequent periods. In anticipation of increasing maturities, Ally has built a solid cash liquidity position that, combined with secured committed credit availability, extends its liquidity runway through 2011. Though Ally will probably need to issue additional debt to extend its liquidity through the end of 2012, the amount of debt that it needs to raise should be manageable given what it issued in 2010. Further transition in Ally's funding mix through growth of stable low-cost deposits and reduced reliance on wholesale funding would be a credit positive, strengthening the firm's liquidity and potential for stronger profitability.

Positive asset quality performance trends in Ally's core businesses also contributed to the firm's ratings upgrade. Ally reported 2010 full year earnings of $1.1 billion, a sharp contrast with a 2009 loss of $10.3 billion. The most significant component of the year-over-year swing was a large decline in credit provisions in Ally's auto and mortgage segments. Auto loan default frequency and loss severity both improved during the year , and together with tighter underwriting in recent quarters, led to sharply lower non-performing loan levels and loss provisions. Reserves were released in both business segments. Moody's does not expect that Ally's 2011 earnings will reach 2010 levels because the reduction in provision expense and allowance levels is probably not repeatable in the same magnitude as in 2010.

Moody's believes that Ally's distinguishing franchise characteristic is its strong penetration of GM and Chrysler dealer floorplan relationships, which also provides it with access to high volumes of retail loan and lease originations. Increasingly, Ally is becoming less reliant on GM and Chrysler subvened receivables and has grown its position in standard-rate retail business. However, Ally's business model entails continuing GM and Chrysler related concentrations and its funding model remains concentrated in wholesale sources, which limits its credit strength.

Additional constraints on Ally's ratings include its remaining exposure to ResCap contingencies, ownership and business model transition related execution risks, and uncertainty regarding the sustainability of long-term performance prospects

The notching between the ratings assigned to ResCap's senior secured (second lien) and senior unsecured debt reflects Moody's estimate that the secured lenders would have materially lower loss severity than unsecured creditors in a default scenario.

The stable ratings outlook for Ally and ResCap reflects Moody's expectation that operating performance and asset quality trends in its auto and mortgage businesses will continue to stabilize in 2011. The stable outlook also incorporates Moody's expectation that capital support needs that could develop at ResCap over the next 12-18 months are not likely to materially weaken Ally's capital position. Moody's also anticipates that Ally's ownership and business transitions will be well-managed in light of potential risks to the stability of the firm's funding and operations.

Ratings upgraded in today's action include:

Ally Financial Inc.

Issuer Rating: to B1 from B3

Senior Unsecured: to B1 from B3

Preferred Stock, Series A: to Caa1(hyb) from Caa3 (hyb)

Preferred Stock, Series G: to B3 (hyb) from Caa2 (hyb)

Ally Credit Canada Limited:

Backed Senior Unsecured: to B1 from B3

GMAC Australia LLC:

Backed Senior Unsecured: to B1 from B3

GMAC International Finance B.V. :

Backed Senior Unsecured: to B1 from B3

GMAC Bank GmbH:

Backed Senior Unsecured: to B1 from B3

Residential Capital, LLC

Senior Secured (second lien): to Caa3 from C

Senior Unsecured: to Ca from C

In its last Ally and ResCap rating actions, dated February 5, 2010, Moody's upgraded Ally's senior unsecured rating to B3 from Ca and affirmed ResCap's ratings at C.

The principal methodology used in this rating was Analyzing the Credit Risks of Finance Companies published in October 2000.

Ally Financial Inc. is a global provider of auto finance, residential mortgage finance, and related products and services. Residential Capital, LLC is a wholly-owned subsidiary of Ally engaged in residential mortgage origination and servicing.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Young
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades Ally Financial senior unsecured to B1, ResCap to Ca
No Related Data.
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