DBRS Comments on GMAC Inc. Q4 2009 Results, Unaffected at BB (low), Trend Stable

DBRS has today commented that the ratings of GMAC Inc. (GMAC or the Company) and certain related subsidiaries, including its Issuer and Long-Term Debt rating of BB (low) are unaffected by the Company’s announcement of Q4 2009 results. The trend on all ratings is Stable.

Today’s comment follows GMAC’s Q4 2009 earnings release indicating a net loss of $5.0 billion. While the loss is sizeable, DBRS notes that the results are within expectations. GMAC’s previously announced actions taken by the Company related to legacy assets in its mortgage operations were the primary drivers of the loss. Importantly, the quarterly results of the core Global Automotive segment further illustrate the improving performance of the segment.

Global Automotive reported a solid pre-tax profit of $309 million, the fourth consecutive quarterly profit. The segment’s results were driven by a 36% increase in North American pre-tax profit, on a quarter-linked basis. Net finance revenue improved driven by sound remarketing gains on off-lease vehicles. Partially offsetting this was increased provision expense related to the runoff of the Nuvell portfolio and wind down costs in the International Automotive division. Originations at $8.2 billion for the quarter continue to increase, further evidencing the good momentum in the core business. Originations from GMAC’s new OEM partner, Chrysler, continue to increase, with the Company nearly doubling its retail penetration and increasing its wholesale penetration to 77%. Chrysler as an OEM partner provides a degree of revenue diversification.

Overwhelming the solid results in Global Automotive was a $4.0 billion pre-tax loss in the Mortgage Operations segment. The primary drivers of the loss were substantial strategic actions taken by GMAC to minimize the risk in Residential Capital, LLC (ResCap) and limit the future adverse effects of ResCap on GMAC. As previously announced, the Company incurred a pre-tax loss of $2.6 billion on the reclassification of legacy mortgage assets from HFI to HFS and recorded a $573 million mortgage repurchase reserve expense in ResCap. DBRS views the sizeable write-downs on the mortgage portfolio as reducing the risk to GMAC of additional outsized losses should unemployment remain elevated and result in further deterioration in the performance of the portfolio.

Credit metrics within the Global Automotive segment remain elevated, but show indications of stabilizing. Losses on a managed basis increased to 3.57% from 3.29% in the prior quarter. Slightly higher loss severity, seasonal factors and continuing weak labor markets contributed to the increase. Delinquencies remained largely unchanged at 3.48%. Excluding the stressed Nuvell portfolio, which contributed 38% of the delinquencies but accounts for only 12% of the total portfolio, delinquencies moderated to 2.62% from 2.80% in the prior quarter. DBRS sees credit metrics remaining elevated through 2010, as labor markets continue to be under pressure. However, DBRS expects to see credit performance improve as the year and the recovery in the economic environment progresses

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 Bank, its subsidiary, and managing the uncertainties surrounding sales volumes of its 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.