Just weeks after receiving its first stand-alone debt rating, Residential Capital Corp. is facing a potential downgrade because of its close ties to its immediate parent, General Motors Acceptance Corp.
Moody's Investors Service Inc. announced last week that it had put its ratings for ResCap, GMAC, and General Motors Corp. under review. The agency said it could downgrade approximately $4.8 billion of ResCap debt, including $4 billion raised in its first-ever bond offering, which closed two weeks ago. The other $750 million of debt is from a proposed 364-day guaranteed revolving credit facility.
GMAC Residential Funding Corp. of Minneapolis and GMAC Mortgage Corp. of Horsham, Pa., were put under the ResCap umbrella in May to help insulate the two businesses from the Detroit automaker's credit woes.
Sanjiv Khattri, GMAC's chief financial officer, told investors Monday in London, "We are satisfied with the quality" of the "ring-fence" between ResCap and GMAC.
"I think as more people get more used to ResCap - as its access to capital improves - we expect ... [the links to GMAC] to continue to weaken," he said.
Moody's rates ResCap's senior unsecured debt Baa2, two notches above junk. GMAC's debt has the same rating; GM's is rated one notch lower.
Though Moody's rates ResCap the highest among the major agencies, both Standard & Poor's Corp. and Fitch Inc. have given ResCap a higher rating than GMAC. All three agencies have said their ratings would be higher if ResCap had no ties to GMAC, which has an investment-grade rating only from Moody's.
Moody's said its review reflects the fact that ResCap is wholly owned by GMAC, which supplies "a substantial amount of its unsecured debt."
However, the agency's press release cited ResCap's "intrinsic credit strengths, including its sound earnings base and liquidity."
Mr. Khattri said that despite its problems with access to capital, GMAC was still on track to earn at least $2.5 billion this year and pay a dividend of more than $2 billion to GM.
Even though he said he expects the U.S. mortgage market - GMAC's biggest market for mortgage business - to shrink this year, he said mortgage profits should still increase.
Mr. Khattri attributed that projection to growth in market share and "fee-for-service business," which includes portfolio servicing, escrow management, and syndication advisory services. Additionally, "one of the biggest reasons" for the income projection "is continued growth in our international mortgage business."
He pointed to GMAC's activities in Japan, China, the United Kingdom, and Mexico and said it is "exploring new markets like Holland, Spain, Chile," and Taiwan.
(Bloomberg News reported Monday that GMAC had agreed to buy a 20% stake in the Brazilian real estate finance company Rio Bravo Securitizadora SA for an undisclosed amount.)
Mr. Khattri outlined GMAC's funding initiatives to counter the weakness of its parent. The initiatives include increasing sales of auto loans and securitization in new markets like the United Kingdom and Germany.
Also, "we're growing all our banks, in particular the residential mortgage bank and the auto bank," he said. GMAC has "underutilized" those two units.
GMAC Bank, a Greenville, Del., unit of ResCap, had $4.8 billion of assets as of March 31. GMAC Automotive Bank of Midvale, Utah, had $1.5 billion.
