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February 8, 2008 |
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RESIDENTIAL CAPITAL: Moody's Downgrades Sr. Debt Rating to 'B2' Moody's Investors Service downgraded to B2, from Ba3, its ratings on the senior debt of Residential Capital, LLC (ResCap). Separately, the senior unsecured rating of GMAC LLC was downgraded to B1 from Ba3. The rating outlook for both firms is negative. The downgrade reflects: 1) a decline in the company's liquidity profile; 2) the risk that ResCap's net worth could fall below its minimum net worth covenant in the absence of support from its parent, which support is not assured; and, 3) Moody's belief that ResCap's franchise is impaired. In general the company's liquidity is ak due to its high concentration of secured market funding and therefore very low level of unencumbered assets. This position leaves the company vulnerable to disruptions in the wholesale markets. The previous rating had anticipated that ResCap would increase its reliance on deposits and Federal Home Loan Bank advances by originating more assets in its bank subsidiary. However this has not occurred and the migration to bank funding is uncertain. Additionally, short term liquidity concerns had been mitigated by the company's buildup of a sizable cash balance of US$6.5 billion at Sept. 30, 2007. This balance declined by US$2.1 billion in the fourth quarter primary due to the company being unable to sell certain international residential mortgage inventory. Of the US$4.4 billion cash balance at Dec. 31, 2007, US$1.4 billion is in the company's bank subsidiary and unavailable to service unsecured maturities. Moody's considers this cash balance decrease to represent a substantial decline in the company's contingent liquidity profile. ResCap recorded a US$921 million loss in Q407, representing its fifth consecutive quarterly loss. During the quarter the company received a US$1.1 billion capital benefit from its parent, GMAC, through GMAC purchasing ResCap debt in the open market below par and subsequently contributing this debt to ResCap at which point it was retired. This capital benefit prevented the company from violating its minimum net worth covenant of US$5.4 billion at Dec. 31, 2007. Moody's believes ResCap is likely to incur additional losses over the coming quarters, possibly at a level that would reduce capital below its minimum net worth covenant. The non-performing level of ResCap's held-for-investment portfolio continues to be well above its rated peer group across loan types, and Moody's considers its loan loss allowance to be low at 23% of nonaccrual loans at Dec. 31, 2007. Additionally, it is unclear what level of reserving will be required for repurchase requirements and other contingent liabilities in the coming quarters. If ResCap's losses would result in the company violating its minimum net worth covenant, there is no guarantee that its parent, GMAC, or its ultimate parents, General Motors and Cerberus Capital Management, would provide the support required to avoid a covenant violation. Moody's has come to believe that ResCap's parents may have a limited tolerance for supporting ResCap if ResCap's performance and condition fail to meet management's 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. "Beyond the horizon of the first half of 2008, we believe further support from ResCap's parents will become increasing less certain, as continued underperformance on the part of ResCap could signal a failure of the firm to regain solid footing," said Moody's Vice President Craig Emrick. Finally, Moody's believes ResCap's franchise has been impaired. "We consider ResCap to have a weak competitive position in the US mortgage sector where all of its major competitors can rely on robust retail origination channels, low cost deposit funding, and earnings diversity," said Mr. Emrick. Moody's believes the company's ability to gain market share and return to robust profitability is limited. Downgrades: Issuer: Residential Capital, LLC -- Multiple Seniority Shelf, Downgraded to a range of (P)B3 to (P)B2 from a range of (P)B1 to (P)Ba3 -- Subordinate Regular Bond/Debenture, Downgraded to B3 from B1 -- Senior Unsecured Regular Bond/Debenture, Downgraded to B2 from Ba3 Issuer: Residential Funding of Canada Finance ULC -- Senior Unsecured Regular Bond/Debenture, Downgraded to B2 from Ba3 ResCap is a subsidiary or GMAC LLC and is headquartered in Minneapolis, Minnesota. Rescap reported equity of US$6.0 billion at Dec. 31, 2007. ReCap has operations in Mexico. |
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