DBRS Maintains GMAC LLC at Under Review – Negative Following Q4 2008 Results, Senior at CCC

DBRS has today commented that the ratings of GMAC LLC (GMAC or the Company) remain Under Review with Negative Implications, where they were placed on October 30, 2008.

This comment follows GMAC’s earnings release indicating net income for Q4 2008 of $7.5 billion. The results were driven by a sizable $11.4 billion gain related to the Company’s bond exchange completed during the quarter. However, excluding this one-time gain, GMAC reported an underlying operating loss of $3.96 billion, driven by ongoing stress at its automotive segment and a loss, excluding debt retirement, of $1.7 billion at the Company’s Residential Capital, LLC (ResCap) business unit. Ongoing credit market turmoil and declining used vehicle prices contributed to GMAC’s core Global Automotive Finance segment loss of $1.3 billion for the quarter. The acceleration in the weakening of the U.S. economy and falling used vehicle prices during Q4 2008 resulted in rising credit reserves, a $425 million pre-tax impairment to its operating lease portfolio and a valuation adjustment in the held for sale (HFS) assets and retained-interest portfolio. Moreover, total net financing revenue was compressed by increased funding costs and a significant decline in origination volume owing to reduced market liquidity and lower General Motors Corporation (GM) automotive sales.

Although DBRS expected continued earnings pressures, it remains concerned that the continuing deterioration in GMAC’s core automotive segment will reduce the Company’s ability to defend its franchise. Moreover, given the escalating pressure on consumers, declining U.S. automotive sales and the overall deteriorating operating environment, the prospect for a quick recovery is diminishing. The weakness in used vehicle prices further exacerbates this concern as loss severities remain high while sales processed on lease terminations continue to fall.

DBRS does note that GMAC’s recent successful conversion to bank holding company status has stabilized the Company’s short-term liquidity profile. As a bank holding company GMAC gains additional access to liquidity and capital, which enhances the Company’s financial flexibility. Moreover, GMAC may gain additional liquidity and funding support should it be approved to issue AAA debt insured by the Federal Deposit Insurance Corporation (FDIC). That said, the ongoing global credit market dislocations and rapid deterioration in the U.S. auto sales continue to pressure the Company’s liquidity and funding profile. GMAC’s capitalization has improved as a result of the recent bond exchange and debt retirement as well as the $5 billion of Troubled Asset Relief Program (TARP) funds received from the US Treasury. Pro forma total equity, including the rights offering completed subsequent to the end of the year, was $23.7 billion.

DBRS expects to resolve the review in several steps and with various rating actions. In terms of the Issuer Rating and newly issued debt (as a result of the completed exchange offer), the review and ultimate resolution and rating will consider the final structure of GMAC, its liquidity profile, its future earnings potential and its overall business strategy. Moreover, the final ratings will consider the recovery prospects of newly issued debt as it relates to other forms of outstanding debt. The ratings of existing debt that was not exchanged will reflect the subordinate position of this debt as a result of the newly issued exchanged debt. Moreover, included in its review, DBRS will assess GMAC’s ability to protect its franchise and return to profitability given the challenges the current environment presents.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Auto Finance Companies Operating in the United States, which can be found on our website under methodologies.

This is a Corporate (Financial Institutions) rating.