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February 7, 2008 |
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GMAC LLC: Moody's Drops Senior Unsecured Rating to B1 from Ba3 Moody's Investors Service has downgraded the senior unsecured rating of GMAC LLC to B1 from Ba3. Separately, the senior unsecured rating of Residential Capital LLC was downgraded to B2 from Ba3. The rating outlook for both firms is negative. The GMAC rating action is a result of Moody's downgrade of Residential Capital's ratings. Since Dec. 21, 2007, the ratings of GMAC and ResCap had been aligned at Ba3, reflecting Moody's view that GMAC would likely provide support to ResCap and that such support could compromise GMAC's stand-alone (ex-ResCap) credit profile. During the fourth quarter of 2007, GMAC did in fact provide support to ResCap, by acquiring its debt at a cost of approximately US$740 million, representing a substantial discount to par, and thereafter contributing the debt to ResCap. Upon retiring the debt, ResCap recognized a US$1.1 billion capital benefit that helped it avoid breaching its minimum tangible net worth financial covenant. In Moody's view, GMAC's willingness to use its cash and capital for this purpose diluted its own liquidity and capital positions. GMAC's rating downgrade contemplates that the firm will likely continue to provide capital support to ResCap in the near term, primarily through similar open-market debt repurchases. Moody's has come to believe, however, that GMAC may have a limited tolerance for supporting ResCap if its performance and condition fail to meet management expectations for improvement during the first half of 2008. GMAC's further support of ResCap could result in additional strains on its capital and liquidity positions. In relation to this, creditors' appetite to extend credit to GMAC beyond current commitments could be affected by GMAC's continued willingness to provide support to ResCap. "Given GMAC's strategic importance to GM, we think that GMAC's owners will not risk the firm's viability in its efforts to stabilize ResCap," said Moody's analyst Mark Wasden. "GMAC's B1 rating incorporates our expectation of the level of capital that GMAC could be required to provide to ResCap during the first two quarters of 2008, while ResCap confronts its operational issues. Beyond this horizon, we believe further support from GMAC to be less certain, as continued underperformance on the part of ResCap could signal a failure of the firm to regain solid footing" Mr. Wasden added. This perspective results in GMAC's B1 rating being positioned one-notch above ResCap's B2 rating. The negative rating outlook assigned to GMAC's rating incorporates the continuing uncertainty regarding the extent and nature of the support GMAC may provide to ResCap. The negative outlook also reflects other pressures on GMAC's stand-alone profile arising from its association with ResCap, including higher borrowing costs and potential constraints to its access to critical funding support. GMAC is also beginning to contend with deteriorating asset quality measures, brought about by a less conducive credit environment that could also have a deleterious effect on its access to funding and its profitability. Key strengths continue to be its valuable auto finance origination and servicing franchise, its position of strength in terms of its financing share of General Motors Corp. auto sales, and its diligent liquidity and credit risk management practices. Absent the ResCap related stresses, GMAC's stand-alone profile could warrant a slightly higher rating profile. A significant constraint to higher ratings, again setting ResCap aside, is the firm's high stand-alone leverage and its continuing business risk concentrations with lower-rated GM(CFR at B3). Based in Detroit, GMAC LLC -- http://www.gmacfs.com/ -- (formerly General Motors Acceptance Corporation) is a provider of retail and wholesale auto financing, auto insurance and warranty products, and through its wholly-owned subsidiary Residential Capital LLC, residential mortgage products and services. GMAC was established in 1919 and currently employs about 31,000 people worldwide. Its Latin American operations are located in Argentina, Brazil, Chile, Colombia, Mexico and Venezuela. GMAC reported a preliminary 2007 fourth quarter consolidated net loss of US$724 million. |
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