GMAC, ResCap cut deeper into junk, may sell a unit
By Jonathan Stempel
NEW YORK (Reuters) - GMAC LLC and its Residential Capital LLC mortgage unit were cut several notches deeper into junk status by Standard & Poor's, which said mounting mortgage losses might require new capital injections from General Motors Corp GM.N and Cerberus Capital Management LP CBS.UL.
Separately, ResCap said it may sell its business that finances vacation resorts. It said it has borrowed $635 million under a new $750 million financing agreement from GMAC to fund that business's operations while it looks for a buyer.
GMAC has been exploring asset sales, acquisitions and joint ventures for ResCap, which lost $4.35 billion in 2007 as the housing slump led to higher defaults and lower loan volume. That resulted in a $2.33 billion overall loss for GMAC.
ResCap is the largest independent U.S. mortgage lender after Countrywide Financial Corp CFC.N, which agreed last month to be acquired by Bank of America Corp (BAC.N).
S&P on Friday downgraded GMAC three notches to "B-plus," its fourth-highest junk grade, from "BB-plus," and cut ResCap four notches to "B" from "BB-plus." Its rating outlook is negative, suggesting further downward pressure.
Cerberus, the private equity firm, led a group that bought 51 percent of GMAC from GM in 2006. The automaker owns the other 49 percent.
S&P said the housing slump, a weak economy and tight credit markets will make it more difficult for ResCap to return to profitability, after five straight quarterly losses. More than 100 mortgage lenders quit the industry in the last year.
Analyst John Bartko wrote that further losses could cause ResCap to breach a $5.4 billion tangible net worth covenant, requiring more support from GMAC, and thus GM and Cerberus. ResCap ended 2007 with a $6 billion tangible net worth.
ResCap's downgrade reflects "a still-difficult funding environment, and our perception of the reduced potential for parental support," while GMAC's reflects ResCap's declining value, the funding environment and "a weaker operating environment in the auto lending business," Bartko wrote.
On Wednesday, GMAC said it would restructure its auto finance unit, shutting some offices and eliminating 930 jobs. Last year, it announced 5,000 job cuts at ResCap.
GMAC spokeswoman Gina Proia said "we're extremely disappointed" in the downgrade, but that GMAC still expects to be profitable in 2008.
Cerberus spokesman Peter Duda did not immediately return requests for comment. The firm's founder Stephen Feinberg wrote in a January 22 letter to investors that GMAC "could run into substantial difficulty" if credit markets keep declining, and cause "a prolonged environment of capital market shutdown."
CERBERUS STRUGGLES
S&P's new ratings mirror those assigned by Moody's Investors Service. That credit rating agency on February 5 downgraded GMAC debt to "B1," and ResCap debt to "B2."
GMAC is based in Detroit, and ResCap in Minneapolis.
Cerberus has struggled with several investments in recent months. It controlled Aegis Mortgage Corp, a lender that went bankrupt in August, and is losing money at automaker Chrysler LLC, which it bought in August.
In addition, Scottish Re Group Ltd SCT.N, a struggling reinsurer that received $300 million from Cerberus last May, on Friday said it may sell some units and cut costs after suffering mortgage investment losses and an S&P downgrade.
GM shares fell 51 cents, or 2.1 percent, to $23.79 in late afternoon trading on the New York Stock Exchange.
ResCap's 8 percent notes maturing in 2013 fell 0.7 cents on the dollar to 58.7 cents, yielding 21.72 percent, according to Trace, the Financial Industry Regulatory Authority bond pricing service. The level is considered "distressed."
GMAC's 8 percent bonds maturing in 2031 fell 3.8 cents to 78.8 cents, yielding 10.43 percent, Trace said.
(Additional reporting by Richard Barley in London; Editing by Dave Zimmerman, Tim Dobbyn, Gary Hill)
