DBRS Completes Review of GMAC Inc. Upgrades to BB (low), Trend Stable

DBRS has today upgraded the Issuer and Long-Term Debt ratings of GMAC Inc. (GMAC or the Company) and certain related subsidiaries to BB (low) from CCC. The trend is Stable. Concurrently, the aforementioned ratings have been removed from Under Review with Positive Implications where they were placed on December 31, 2009. Today’s rating action does not impact the ratings of Residential Capital LLC (ResCap), GMAC’s mortgage origination and servicing subsidiary. ResCap’s Issuer and Long-Term Debt ratings remain at C, Under Review with Negative Implications, where they were placed on November 21, 2008.

Today’s rating action reflects DBRS’s recognition of the substantial progress GMAC has made in improving its financial strength. Liquidity and capitalization have improved, while risk, most notably at ResCap, continues to be taken out of the balance sheet. The ratings upgrade also considers GMAC’s renewed focus on its Auto Finance division, which boasts significant franchise strength, stable and predictable asset quality measures, and solid operating performance. Importantly, the ratings consider the significant support received from the U.S. Treasury (UST) so that GMAC can continue to perform the duties of providing credit to a key sector of the U.S. economy. As a result of the various actions, the UST now has a 56% share of common ownership in GMAC. The capital infusions from UST and other actions taken by various U.S. governmental bodies have allowed GMAC to absorb the expected significant loss in Q4 2009, yet remain well-capitalized and liquid. While DBRS acknowledges the strengthening of the capital base, DBRS views the quality of capital as weak due to the dominance of high-cost MCPs and TRUPs in the capital stack. The limited equity capital, the preponderance of the high-cost securities, and the resulting lower earnings and capital generation abilities constrains the rating.

GMAC has taken substantial steps to minimize the risks inherent in ResCap and to limit the future adverse effects on GMAC related to ResCap. As a result of these actions, GMAC is expected to recognize a pre-tax charge of approximately $3.8 billion in Q4 2009, with $3.3 billion related to mortgage write-downs at ResCap and Ally Bank and $500 million related to repurchase reserve expense. Although GMAC’s exposure to ResCap is significantly reduced from the high levels in 2007, given the limited common equity position, DBRS sees a level of risk remaining. Moreover, indirect risks related to ResCap, such as repurchase risk remains as a noteworthy risk. ResCap continues to be highly dependent of ongoing support from GMAC.

Liquidity and funding have improved. GMAC continues to shift its funding model to a bank funded platform. As such, a majority of new auto originations are now executed in GMAC’s Ally Bank (Ally) subsidiary, which has also benefited from the 23A exemption received from the Federal Reserve in late 2008. Moreover, liquidity has benefited from the $7.4 billion of issuances under TLGP in 2009. Deposits have increased 48% in the first nine months of 2009, to $29.3 billion, however Ally has a sizeable amount of CD’s maturing in 2010. Retention of these deposits may prove challenging, given the current rate environment, and fierce competition for deposits. Further, GMAC’s improved funding profile is illustrated by its ability to access the asset-backed securities market. GMAC has approximately $18 billion of debt maturities through 2011, as such, a level of refinancing risk remains. DBRS expects that GMAC will demonstrate its ability to tap the unsecured market in the near-term. Success in further improving liquidity and funding profiles will be viewed positively and could ultimately lead to upward rating pressure.

Importantly, GMAC’s core Auto Finance franchise remains solid. Profitability has rebounded as volumes and used vehicle prices have normalized. Asset performance has remained within DBRS’s tolerance levels even in the most stressed period of the GM bankruptcy. To that end, GMAC did not record any material losses as a result of the GM bankruptcy. Further, demonstrating the strength of the core franchise, GMAC continues to increase its market share of both GM and Chrysler retail auto sales and has maintained its dominant position in financing GM dealership inventory (floorplan) while becoming the preferred lender for Chrysler dealerships. However, the uncertainties regarding sales volumes of GM and Chrysler products remain.

The Stable trend reflects DBRS’s expectations that the Company will continue to face significant obstacles, which include reestablishing a pattern of solid earnings, further diversifying and strengthening its funding profile, continuing growth in deposits at Ally, and managing the uncertainties surrounding sales volumes of the OEM partners. Ultimately, GMAC faces the challenge of decreasing its reliance on governmental support. Over the long-term, positive rating momentum could result should GMAC return to an acceptable level of profitability, while illustrating asset quality measures consistent with historic levels. Further, improvement in the capital structure evidenced by a noteworthy reduction in the amount of TRUPS and MCPs in the capital stack in conjunction with an enlarged common equity share will be viewed as an important factor which could result in upward ratings migration.

Note:
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.