GMAC has had to put up with a lot of headaches lately, thanks to its residential real estate finance unit, Residential Capital.
Last week, the mortgage lender was hard at work on a $14 billion debt restructuring to stave off bankruptcy. That arrangement cost ResCap anyway, in the form of downgrades on its unsecured debt from both Fitch Ratings and Standard & Poor's. Fitch Ratings went a step further and downgraded GMAC's issuer default rating further into junk territory. News reports also had it that GMAC was negotiating the terms of a $3.5 billion loan to keep ResCap out of bankruptcy.
Given all of these importunate developments, it's a good thing that GMAC has a diversified lineup of product offerings to fall back on, particularly auto loans.
Or does it?
A recent report from Fitch Ratings highlighted weaknesses in the prime auto ABS sector, owing to declining performance from 2007 to 2008. Specifically, Fitch said its prime delinquency and annualized net loss index for March 2008 soared 73% above levels in March 2007.
"We would argue that performance has weakened, but performance over the last two or three years was unsustainably good," said Christopher Wolfe, a managing director at Fitch Ratings. "Loss and delinquency figures had gotten so low, they had nowhere else to go but up."
Still, Fitch analysts acknowledged that there is very little at work to counteract the current pace of loss frequency and severity on auto ABS pools. Therefore, asset performance could remain under pressure, ultimately resulting in higher delinquency and loss levels during the second quarter.
Also, it looks like GMAC's problems might begin to affect General Motors, which partially owns GMAC. In an outlook on Ford Motor Co. and General Motors after their 1Q08 earnings, Fitch cited a material capital infusion into GMAC as one of several events that could trigger a ratings downgrade of the parent company.
The fate of General Motors is important to the ABS note holders, said one market source.
"The biggest risk is if something happens to General Motors," said one market source. "That would change the recovery assumption, which is a tremendous aspect affecting cash flows to the trust. As a note holder, that is what you really care about."
A bankruptcy at GMAC, which also services securitized auto loans, would probably not spook ABS investors, because current estimates for recovery rates would not cause a lot of worry for holders of triple-A auto ABS notes.
Yet something strange happened with a recent GMAC issuance. The GMAC deal priced its A3 notes at swaps plus 145 basis points, and its A4 notes at 185 over swaps. Another recent auto ABS deal from USAA Auto Owner Trust, priced its A3s at 155 to swaps and A4s at 180 basis points over the benchmark.
"I think the market has got the trade wrong," said one source. "There is no way in the world you buy [paper from] the Big Three anywhere near where you could buy someone like USAA."
Such trading activity might represent wrongheaded thinking, but for whatever reason it is happening. If ABS investors allow legitimate concerns about ResCap's MBS paper to develop into fears surrounding GMAC's auto ABS deals, then GMAC might find itself with albatrosses weighing it down.
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