NEW YORK, June 16 (Reuters) - Moody’s Investors Service on Monday cut its ratings on finance company GMAC LLC, and may cut its mortgage arm Residential Capital LLC, saying that the mortgage lender has not proven it can generate enough cash to service its debt.
ResCap and GMAC earlier this month completed a $60 billion refinancing to buy time to turn around the struggling lender, which is paying a steep price for its risky bets on residential mortgage loans.
The refinancing included exchanging debt for new bonds with later maturities, renewing bank credit lines and obtaining new capital injections from GMAC and private equity firm Cerberus Capital Management LP, which owns 51 percent of Detroit-based GMAC.
GMAC’s common and preferred interests in ResCap, in additional to its credit extensions, have risen to represent 85 percent of GMAC’s net worth, as of March 31, compared with 46 percent at the end of 2007, Moody’s said in a statement.
The credit extensions are backed by assets, which give GMAC a priority position in a ResCap bankruptcy. But there is some uncertainty about how much debt principal would be recovered, the ratings agency added.
Moody’s cut GMAC’s rating one notch to “B3,” six steps below investment grade, from “B2.” The outlook is negative, indicating an additional cut is more likely within the next 12 to 18 months.
ResCap has significant maturities in 2010, senior secured bonds of $1.7 billion, senior unsecured bonds of $1.8 billion, and the new $3.5 billion credit facility provided by GMAC, Moody’s said.
“Even after this exchange, we believe ResCap’s debt levels remain inconsistent with its long-term earnings potential,” the ratings agency said, adding that “given the continuing operating uncertainties at ResCap, the increase in exposure weakens GMAC’s stand-alone credit profile.”
Moody’s said it may cut its ratings on ResCap’s unsecured senior debt and unsecured subordinated debt from “Ca” and “C”, respectively, both ten steps below investment grade and the lowest rating before default.
It also assigned ratings of “Caa2 and “Caa3” to ResCap’s senior secured and junior secured bonds, respectively, which is eight and nine steps below investment grade. (Reporting by Karen Brettell; editing by Gary Crosse)