With General Motors Corp.'s corporate debt rating perched on the brink of speculative-grade territory by Standard & Poor's, most in the market seem to be confident about the spread stability on the issuer's outstanding ABS. But while most are confident, not everyone is.
"I wouldn't expect to see any spread widening in GMAC's CARAT or SWIFT programs," said a sell-side ABS analyst. He said GMAC's securitized debt is strong enough to withstand any nervousness that might seep into the ABS market from negative ratings news on the corporate front. "The risk of a negative outlook, and a downgrade, could possibly cause some panic selling [of the company's ABS], but even then investors should look at that as a buying opportunity," added the analyst.
From a purely ratings perspective, GM and GMAC's ratings are unlikely to affect GMAC's ABS. "While an unexpected downgrade of GM or GMAC, particularly to non-investment grade [status], could put pressure on operational performance, the near-to-mid term impact is considered to be well within the scenarios contemplated in assigning ratings to the ABS transactions, particularly given the low level and low volatility of losses," writes Kevin Duignan, head of Fitch Ratings ABS group. Duignan notes that a GM downgrade could have a more pronounced effect on GMAC's SWIFT dealer floorplan transactions, because the parent has repurchase agreements with its dealer base and, therefore, dealers may be forced to unload unsold automobiles elsewhere and at lower prices. Even given that scenario, most analysts seem far from concerned.
One element working in favor of the company's ABS, though not as directly, is Lehman Brothers' inclusion of Fitch into its Aggregate Index. The indices, which until recently used only Moody's Investors Service and S&P ratings, based on the lower rating of the pair, which, for issuer GMAC parent GM, is at BBB-' by S&P. Now, with all three ratings services incorporated, the Lehman Index bases an issuer's status based on the middle rating of the three.
In the short term at least, that helps GM, because Fitch rates the company's corporate debt at BBB', in line with Moody's Baa2', each two notches away from speculative-grade. That means that even with an S&P downgrade in the near term - should all three downgrade GM by one notch, its debt would still be considered speculative grade, at least at least until further downgrades. All three rating agencies rate GMAC one notch above its corporate parent.
Oddly enough, Lehman's analysts are among the few in the industry who expect GM's corporate rating to affect its ABS spreads. "There has been a strong historical correlation between GM corporate spreads and auto ABS spreads. Though this relationship weakened over the past year, due to the favorable ABS demand technicals, we expect the ABS-corporate correlation to increase as seller/servicer concerns grow," wrote Lehman ABS analysts in a report last week.
Lehman goes on to note that on the mortgage ABS side, GMAC has already moved to address the possibility of guilt by association with its parent's ailing corporate rating. "GMAC announced that its two residential mortgage operating subsidiaries, GMAC Mortgage and Residential Funding [GMAC-RFC], would become wholly owned subsidiaries of an intermediate holding company, Residential Capital Corp., that itself would still be owned by GMAC. Residential Capital would, in turn, seek stand-alone credit ratings based on its capital structure and corporate governance," note Lehman analysts. The stand-alone entity would reducer seller/servicer risk by insulating the mortgage origination business from its other financing operations.
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