DBRS Revises Review of Residential Capital, LLC to Developing from Positive; Issuer Rating at “C”

DBRS, Inc. (DBRS) has today revised its review of the ratings of Residential Capital, LLC (ResCap or the Company), including its Issuer and Long-Term Debt ratings, to Under Review Developing from Under Review with Positive Implications, where they were placed on February 4, 2011. The Issuer and Long-Term Debt ratings of ResCap remain at “C”.

DBRS’s rating action reflects the sizeable losses generated by the Company in 3Q11, which has materially reduced its tangible net worth covenant cushion. For the three months to September 30, 2011, ResCap’s financial results were negatively impacted by a sizeable valuation charge taken against the mortgage servicing rights (MSR) asset, reflecting the decrease in interest rates during the period. The charge resulted in ResCap reporting a $442 million loss for the quarter and a loss for the nine months ending September 30, 2011. The loss reduced the Company’s tangible net worth to $331 million from $846 million at year-end 2010, which is approaching the $250 million minimum covenant.

The change in the review status also reflects DBRS’s opinion that there is increased uncertainty as to the willingness of the Company’s parent, Ally Financial, Inc. (Ally) to provide additional funding and capital support, should it be required, given recent statements by management, which stressed the legal separateness of the entities and its intent to protect Ally’s core auto business. Nonetheless, DBRS acknowledges ResCap’s management’s proven ability to de-risk its balance sheet and manage through extraordinarily challenging operating conditions.

DBRS notes the ratings of Ally Financial, including its Issuer Rating of BB (low), are unaffected by today’s rating action. The trend on the rating remains Positive.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steven Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 9 June 2005
Most Recent Rating Update: 4 February 2011