ResCap Can’t Stand on Own, Moody’s Says

Suggesting that mortgage lending Residential Capital LLC is circling the drain and potentially threatening to take corporate parent GMAC LLC with it, Moody’s Investors Service last week downgraded key credit ratings at both firms. The rating agency said it had downgraded the senior secured, junior secured, and unsecured senior debt ratings of ResCap to C from Ca, while cutting GMAC LLC to C from Caa1. The downgrade comes after GMAC Financial Services said last week that it would look to exchange debt both at GMAC and at ResCap as it looks to become a bank holding company, in order to access funding under the Treasury’s Troubled Asset Relief Program. In ResCap’s case, GMAC is looking to exchange $9.3 billion in bonds at terms that Moody’s said it considered a “distressed exchange,” because the replacement bonds are being offered at a substantial discount to par value and will have longer maturities. See full Moody’s statement. (By substantial, it’s worth noting that the discount to par value of the exchange is in nearly all cases greater than 45 percent — and this is the second such distressed exchange this year involving ResCap.) “It is our opinion that ResCap would not be a going concern without support from GMAC,” said Moody’s vice president and senior credit officer Craig Emrick. “Each month requires additional support from GMAC to prevent ResCap from violating its debt covenants and defaulting on its debt service.” For its part, Moody’s noted that even if GMAC is successful in becoming a bank holding company, it may choose not to support ResCap further — or it may even be precluded by bank regulators from doing so. Additionally, GMAC disclosed in its recent regulatory filing that it does not intend to support ResCap further if the exchange offers are not completed. In discussing a related downgrade at GMAC, Moody’s logic was telling: “[E]xtensions of support to ResCap have weakened GMAC’s capital and liquidity profiles and has resulted in GMAC possessing concentrated risk.” In other words, GMAC may have little choice going forward but to cut loose its ties to ResCap, for the sake of the rest of the financial giant’s future. Write to Paul Jackson at [email protected].