Moody's In-vestors Corp. last week cut its ratings on Contifinancial Corp., despite the subprime lender's potential deal to sell itself to Residential Funding Corp.

Moody's downgraded $700 million of securities on May 20, saying the company's liquidity remains "substantially strained."

On May 20, Contifinancial said it had a received a letter of agreement from the General Motors subsidiary Residential Funding to be completely acquired. Details of the deal were not disclosed, and due diligence must be made before closing.

"The absence of a formal agreement with a strategic partner at this point may indicate continuing challenges the company is having in restructuring its cash flow," the Moody's report said.

Contifinancial has $500 million in unsecured debt that is due in August, and Moody's analyst Steven Nelson has expressed concern about the finance company's ability to pay off the loans.

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