Investors are pressing the rating agencies to spell out what it would take to keep General Motors Acceptance Corp.'s rating from falling in tandem with its parent's.
The agencies have responded by giving rough guidance - but no promises.
Last week Fitch Inc. issued guidance for when a finance subsidiary might get a higher rating than its parent. Fitch said that it had been working on the guidelines for well over a year, but the release seems especially timely. The ratings of both General Motors Corp. and GMAC are dangling precariously above junk status, and analysts say GM's may fall to junk shortly.
Because of GMAC's extensive ties with GM - it finances more than 80% of the new vehicles GM sells to its dealers, for example, and has no independent directors - two of the three agencies give the parent and the subsidiary the same ratings. (Moody's Investor Services Inc. rates GMAC at Baa2, one notch better than GM.)
In a March 30 note to investors, Scott Sprinzen, an analyst at Standard & Poor's Corp., made it clear that S&P is not reassessing its approach to GM and GMAC. However, he did say his agency might reconsider the relationship if certain conditions were met, including "the sale of a significant ownership stake in GMAC to a third party, installation of independent board members, and the inclusion of relatively comprehensive and restrictive financial covenants."
But Mr. Sprinzen stressed that doing those things "would not be sufficient to ensure a higher rating on the restructured GMAC; the nature of the ongoing business ties would still need to be considered."
Moody's rates GMAC slightly better than GM, because it expects that, "in the event of bankruptcy, GMAC's unsecured creditors would experience superior asset recovery relative to the unsecured creditors of GM," according to an April 5 announcement of ratings reductions for both. Moody's also pointed to GMAC's "strong stand-alone characteristics," including the "growing contribution of its mortgage and insurance operations."
Fitch's opinion became more important this year when Lehman Brothers said it would start counting the agency's ratings in its credit index. Beginning in July, a company that gets junk ratings from two of the three agencies will get booted from the index, to which many investment portfolios are tied. Currently, a company gets kicked out if Moody's or S&P drops it below investment grade.
Christopher D. Wolfe, the senior director of the financial institutions group at Fitch, said in an interview last week that the current structure of GM and GMAC satisfies some of Fitch's criteria but not others.
For example, independent corporate governance in the form of outside directors "currently does not exist" at GMAC, he said.
The terms of the operational agreement between the two is also a gray area, Mr. Wolfe said. "I would say that some of the terms in there lack clarity. For example, GM has promised to maintain 'commercially reasonable' leverage at GMAC. … For us to hang a separation on that kind of language is very tough, because I don't know what that means."
One area where GMAC appears to satisfy Fitch's guidelines is in its meaningful business outside of its parent. Fitch said it would look at the diversity of that business, but even there it makes no promises.
If a company "were in all kinds of different things and not very good at any of them, the fact that they had diversity is not going to help them," Mr. Wolfe said. However, GMAC's substantial mortgage and insurance businesses "would probably satisfy that."
Liquidity is another question. Fitch would consider the size of any of the finance subsidiary's alternative funding sources independent of its parent.
Though it is unclear if GMAC as a whole would satisfy Fitch's liquidity guideline, certain GMAC businesses might, Mr. Wolfe said. For example, "its mortgage businesses are predominantly self-funding through the securitization markets."
