S&P Warns Of Possible ResCap Bankruptcy
Exchange offering shows "gravity of the company's financial position."
May 2, 2008
Standard & Poor's Friday lowered selected ratings of GMAC's Residential Capital LLC, including the long-term corporate credit rating, which was cut to 'CC' from 'CCC+'. The rating agency also warned that ResCap may file for bankruptcy if the company's exchange offer for unsecured bonds fails.
"In this case, Residential Capital LLC would have to replace at least one of the two departed independent directors, as the company's operating agreement requires support from at least one independent director to initiate such a filing,” S&P said. “Accordingly, our ratings on securities that are not part of the exchange offer are also on CreditWatch with negative implications."
The rating agency says the cut in ratings comes after the company launched the exchange offer for unsecured bonds that it sees as "a distressed debt exchange." S&P says the ratings remain on CreditWatch with negative implications, where they were placed on April 24, 2008. There are no ratings or outlook changes on GMAC.
"The downgrade reflects the probability that, with the successful execution of the exchange offer, which will pay less than face value to certain Residential Capital LLC bondholders, Standard & Poor's, in accordance with our criteria, will lower our corporate credit rating on the company to 'SD'," the rating agency said in a statement. "In addition, ratings on the affected debt issues would be lowered to 'D', although the exchange would not constitute a legal default."
The rating agency noted, however, that a successful exchange would extend debt maturities, providing needed relief, but "the action illustrates the gravity of the company's financial position."
Furthermore, the exchange indicates that ultimate parents General Motors and Cerberus Capital Management are pursuing this action rather than directly providing GMAC with additional capital downstream to ResCap.
General Motors owns 49% of GMAC and Cerberus owns 51%.
ResCap wants to offer new secured notes in exchange for any and all of the $12.9 billion of unsecured bonds, according to S&P. "The new secured notes would consist of two classes: 8.5% second-lien notes due May 15, 2010, which would be exchanged for certain existing debt maturing in 2008 and 2009; and 9.625% junior lien notes due in 2015 that would be exchanged for existing debt maturing between 2010 and 2015. Residential Capital LLC would offer the new notes to existing bondholders, grouped by the maturity of the securities that they hold currently, at various exchange ratios."
The rating agency said the exchange offer is part of ResCap’s restructuring plan, which includes a focus on the production of prime, conforming mortgage loans and the reduction of credit risk through the sale or elimination of noncore businesses and products.
In 2006, according to the latest data available on its Website, ResCap was the seventh largest underwriter of residential mortgage loans in the US, producing $161.6 billion in loan origination volume. Also, the firm in 2006 was the seventh largest servicer of residential mortgage loans in the US, with a folio of 3.2 million loans valued at $412.4 billion. Two years ago, the company was the largest US warehouse lender with $13.2 billion in commitments and the third largest US non-agency issuer of mortgage-backed and mortgage related asset-backed securities. Issuance of these ABS and MBS totaled $71.1 billion.
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