General Motors Corp.'s (GM) bankruptcy filing will likely have limited immediate ratings implications on outstanding auto related ABS deals issued by GMAC, Fitch Ratings said.
"The largest potential impact on transaction performance will likely result from meaningful declines in retail and wholesale values on GM manufactured vehicles," said Fitch Senior Director Ravi Gupta. "These declines may arise from potential post-bankruptcy developments such as further declines in consumer demand for new and used GM manufactured vehicles, brand reductions or eliminations, and disorderly reductions in a large number of franchised dealers and their existing vehicle inventories, among other factors.
However, Fitch analysts stated that the government has made clear its intention to support GM throughout this bankruptcy. The government's support includes making funds available to ensure continued manufacturing operations, a viable supplier base, retail and wholesale financing capacity as well as certain dealer support.
"While its unclear if this support will result in an expedited restructuring and exit from bankruptcy, it may limit potential significant immediate asset performance deterioration," Gupta said.
The rating agency also does not think that there is a heightened chance for a servicing disruption for any outstanding ABS deal. The GM filing is not expected to have any immediate financial ramifications on GMAC, which serves as the primary servicer for all deals. GMAC, via a separate ownership and significant government support and funding, should be able to maintain operations and ongoing capacity to effectively continue servicing the assets and fulfill all its servicing obligations.
Fitch now rates around $14.7 billion in outstanding auto loan, auto lease and dealer floorplan ABS issued by GMAC and supported by financings that are related to GM manufactured vehicles.
In terms of auto loan ABS, Fitch said that the potential declines in wholesale values of GM manufactured vehicles might affect performance for GMAC-issued auto loan ABS.
Although Fitch does not think there will be material increases in borrower default frequency resulting from the filing, wholesale value declines will cause lower recovery rates of future defaults, ultimately causing higher lifetime net losses for each auto loan pool. It seems, however, Fitch said that GM, via government support, will be able to honor vehicle warranties as well as ensure availability of parts and services.
GM has also meaningfully reduced new vehicle production to better align existing supply inventory with reduced demand. Both factors might lessen the overall negative impact to used vehicle values.
The rating agency now rates outstanding auto loan ABS transactions issued by GMAC totaling roughly $3.4 billion in outstanding notes. It also rates a deal issued by another sponsor that is supported largely by GM vehicle-related loans sold by GMAC to the issuer.
When it comes to auto lease ABS, wholesale vehicle value declines could also have some near term implications for lease-end residual value realizations, according to the rating agency. As both Chrysler and GM seek to reduce their dealership bases, more vehicles might be forced into the wholesale supply, thus impairing the overall market's wholesale values.
As with auto loan ABS, the rating agency does not expect material increases in lessee default frequency for lease securitizations, although similar severity implications may apply.
Taking to account the above, Fitch thinks a GM bankruptcy's primary risk to lease securitizations is the deterioration in near-term residual value performance.
If there were to be material weakness in residual realizations in the next 6-to-12 months, 2006 and early 2007 vintage lease deals would be more exposed to this stress, Fitch analysts. This is considering their heavy concentrations in near-term residual value maturities. But, these transactions have generally built in considerable loss protection to date, because of the non-declining nature of their credit enhancement structures, the rating agency said.
All rated GM lease securitizations can support base case residual losses consistent with the worst historical experience. Because of this, the rating agency does not expect considerable rating volatility in the case of a GM bankruptcy. But, if residual value
deterioration is worse than expected in the near-term or protracted and impairs the deals' ability to build credit enhancement, rating actions might be necessary.
For dealer floorplan ABS transactions, Fitch anticipates that the GM filing will have a negative impact on new vehicle sales levels at existing dealers, therefore weakening the financial profile of the franchised dealer base and potentially increasing dealer bankruptcies. Additionally, GMs filing could accelerate the phase out of certain brands already indicted as part of their overall restructuring plans, potentially placing respective dealers under added financial
distress, Fitch said.
But, the rating agency said that the targeted dealers generate a relatively small portion of GMs
overall new vehicle sales. Additionally, GM has indicated its intention to orderly phase-out dealers through the year and support existing inventories. Considering the governments recent capital injection and potential funding capacity through its bank subsidiary, GMAC should also be able to provide adequate financing to the outstanding inventory of vehicles for GM dealers, at least on short term basis. Should this occur, the overall negatively impact the dealer floorplan ABS may be limited.
The rating agency downgraded its outstanding GMAC related dealer floorplan ABS on
April 14 and placed all deals on Rating Watch Negative following continued system-wide deterioration in the domestic auto industry and the bankruptcy risk of GM. SWIFT X had previously entered amortization and is accumulating principal pending its near-term maturity date while SWIFT XI will enter early amortization due to a trigger event associated with a GM Ch. 11 filing.
Should monthly payments rates and losses not material deteriorate from current levels, both transactions should repay full principal within the next few months. SWIFT 2007-AE1 and SMART, while structured with significantly more credit enhancement than the previous SWIFT transactions, do not contain a similar trigger event and will continue to revolve in accordance with their transaction documents.
Details About the Bankruptcy
GM and three of its domestic subsidiaries filed for Chapter 11 protection today in the U.S. Bankruptcy Court for the Southern District of New York.
The 101-year old Detroit automaker listed $82.3 billion in assets and $172.8 billion in debt. It expects to emerge from bankruptcy in the next 60 to 90 days through a 363 sale of its assets to a newly reorganized GM.
"The court-supervised process we are pursuing provides us with powerful tools to accelerate and complete our reinvention, as well as strong safeguards for our customers and our business," said Fritz Henderson, president and chief executive of GM, in a statement.
GM's deal with the U.S. Treasury, the federal Canadian and Ontario governments, and the United Auto Workers and Canadian Auto Workers unions will leave 60.8% of GM's common shares owned by the U.S. Treasury, while 11.7% will be held by the Canadian and Ontario governments, 17.5% by the new voluntary employee beneficiary association (VEBA) plan, and 10% by GM for unsecured bondholders and other unsecured creditors.
GM, which employs 244,500 workers spread between 34 countries, will reduce its headcount of salaried employees to 27,200. It did not include its foreign operations in Europe, Latin America, Africa, the Middle East or Asia Pacific in the Chapter 11 filing.
The company sells the bulk of its automobiles in the U.S., followed by China, Brazil, the U.K., Canada, Russia and Germany.
GM said that after the bankruptcy, its annual vehicle volume will decline to 10 million vehicles, compared with 15 million to 17 million of annual vehicle sales from 1995 through 2007.
Post-bankruptcy, the company expects that it will be left with $17 billion in consolidated debt and $9 billion in 9% preferred stock, which is payable on a quarterly basis. There will be $2.1 billion in preferred shares held by the Treasury, and $6.5 billion in preferred shares which will be issued to the new VEBA.
Judge Robert Gerber is presiding over the bankruptcy, filed under case number 09-50026. GM subsidiaries that also filed are Chevrolet-Saturn of Harlem, Saturn and Saturn Distribution Corp.
In a separate announcement, GM Europe said it has arranged 1.5 billion of bridge financing from the German government.
Additionally, GM has secured $33 billion in debtor-in-possession financing to fund its ongoing operations, as well as support any other financing needs.
The automaker plans to focus on selling its core brands Chevrolet, Cadillac, Buick and GMC - through 3,600 dealerships, from its existing 5,969 dealer network. Next year, GM plans to launch its Chevrolet Volt extended range electric car.
"The new GM will play a critical role in the future of the automobile, and assure that the U.S. has a strong stake in this rapidly changing global manufacturing industry," Henderson said.
Weil, Gotshal & Manges attorneys Harvey Miller, Stephen Karotkin Joseph Smolinsky are serving as lead counsel for GM, which is also being assisted by Jenner & Block and Honigman Miller Schwartz & Cohn.
Al Koch of AP Services, an affiliate of AlixPartners, is providing restructuring advice to GM, which is using Morgan Stanley, Evercore Partners and the Blackstone Group for financial advice.
Cravath, Swaine, & Moore is providing counsel to GM's board.
Wilmington Trust is serving as the indenture trustee for the largest group of unsecured debt holders, representing $22.7 billion in securities. The UAW follows as the next largest unsecured claims holder representing $20.5 billion in employee obligations. Deutsche Bank is the third largest unsecured claims holder, representing the holders of $4.4 billion in bonds.
Another organization called GM Bondholders Unite has appointed White & Case financial restructuring and insolvency group head Thomas Lauria to represent its bondholders' interests.
On Tuesday, the New York Stock Exchange will delist GM's shares, which have traded at a range of 74 cents to $18.18 each over the past year. On Monday morning, the company's stock increased 32% to 98 cents a share.
