General Motors Corp. took another ratings hit last week when Moody's Investors Service lowered its corporate rating by one notch to B2 with a negative outlook.
But ABS analysts focusing on the auto sector seem to be taking the negative headlines in stride. Kumar Kanthan, a managing director at Moody's, said no auto transactions are on formal review.
He added that asset-backed securities have structural protection, mitigating the impact of corporate downgrades. However, he pointed out that dealer floor plan transactions would be more sensitive to GM's financial health than retail auto deals.
"In the whole scheme of things, the asset class that is the most linked is the dealer floor plan," Kanthan said. "It's possible that the structural enhancements already contemplate that. But if you just think fundamentally which asset class is most linked, that is the one."
Kanthan explained that with a retail auto deal, the fact that GM is in trouble does not necessarily mean that borrowers would not pay their loans. It's the auto dealers who might suffer.
"Your repayment is from dealers. If GM has financial difficulty, then dealers are more likely to have financial difficulty," Kanthan said.
Joseph Astorina, associate director for ABS research at Barclays Capital, has not heard of any backlash from investors and has not seen a negative impact on secondary trading.
But there isn't much trading to judge lately.
"There hasn't been an effect on secondary levels," Astorina said. "But there also hasn't been any trading on retail loan or floor plan deals. There may be down the road."
He added that there has been thin trading of the GM name for some time. Astorina said trading of General Motors Acceptance Corp. ABS deals under its two trusts - Capital Auto Receivables Asset Trust (CARAT) and Superior Wholesale Inventory Financing Trust (SWIFT) - dried up over the last few months as more negative headlines came out.
However, the latest Moody's downgrade of GM won't have a material impact on these deals.
"A ratings downgrade has no structural impact on the CARAT transactions," Astorina said. "On SWIFT, there was [a] trigger built into them."
A previous downgrade already set off that trigger, stepping up the reserves, Astorina said. He believes it happened when Standard & Poor's rating of GM went below triple-B. The latest rating action by Moody's would have no additional impact beyond that, Astorina said.
GM's ratings were placed under review for possible downgrade on Jan. 26. The downgrade was based on the increasing uncertainty regarding the company's ability to make its wage and benefit structure competitive outside of bankruptcy. GM also needs to resolve the Delphi reorganization and negotiate a significantly more competitive labor contract with the UAW in 2007, the rating agency said.
Additional challenges facing the company include completing the GMAC sale and resolving Securities and Exchange Commission investigations into various accounting matters.
Moody's also cites the company's declining U.S. market share and the ongoing shift in consumer preference away from trucks and SUVs as GM introduces its T900 series of SUVs and light trucks.
GM's liquidity rating is affirmed at SGL-1, the highest category. Also, the ratings of General Motors Acceptance Corp. (Ba1) and Residential Capital Corp. (Baa3) remain unchanged.
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