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GM Bankruptcy Has Marginal Effect on GMAC U.S. Auto ABS, Says Fitch

June 2, 2009

New York — General Motors Corp. (GM)’s filing for Chapter 11 bankruptcy protection is expected to have limited immediate ratings implications on outstanding auto related ABS transactions issued by GMAC, according to Fitch Ratings.  

“The largest potential impact on transaction performance will likely result from meaningful declines in retail and wholesale values on GM manufactured vehicles,” said 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.'  

The U.S Government has made clear, however, its intention of supporting GM through this bankruptcy. This support includes making funds available to ensure continued manufacturing operations, a viable supplier base, retail and wholesale financing capacity and 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,” said Gupta.  

Additionally, Fitch does not believe there is heightened potential for servicing disruption for any outstanding ABS transaction. The GM filing is not expected to have any immediate financial ramifications on GMAC, which is the primary servicer for all transactions. GMAC, through 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 of its servicing obligations.  

Fitch currently rates approximately $14.7 billion in outstanding auto loan ABS, auto lease ABS and dealer floorplan ABS issued by GMAC and supported by financings related to GM manufactured vehicles.  

Potential declines in wholesale values of GM manufactured vehicles may impact performance for GMAC issued auto loan ABS. While Fitch does not expect material increases in borrower default frequency as a result of the filing, decreases in wholesale values will result in lower recovery rates of future defaults, ultimately resulting in higher lifetime net losses for each auto loan pool. It appears, however, that GM, through support from the U.S. Government, will be able to honor vehicle warranties and ensure availability of parts and services. Additionally, GM has meaningfully reduced new-vehicle production to better align existing supply inventory with reduced demand. Both factors may serve to limit overall negative impact to used vehicle values.  

Fitch currently rates outstanding auto loan ABS transactions issued by GMAC totaling approximately $3.4 billion in outstanding notes. Additionally, Fitch rates one transaction issued by another sponsor that is supported largely by GM vehicle-related loans sold by GMAC to the issuer.  

Wholesale vehicle value declines could also have some near term implications on lease-end residual value realizations. As both Chrysler and GM seek to reduce their dealership bases, there is the potential that more vehicles will be forced into the wholesale supply, impairing wholesale values for the overall market.  

As in the case of auto loan ABS, Fitch does not anticipate material increases in lessee default frequency for lease securitizations, although similar severity implications may apply.  

Considering the previously mentioned points, Fitch believes the primary risk of a GM bankruptcy filing to lease securitizations is 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 transactions would be more exposed to this stress, given their heavy concentrations in near-term residual value maturities. However, these transactions have generally built significant loss protection to date, due to the non-declining nature of their credit enhancement structures.  

Currently, all rated GM lease securitizations as listed below can support base case residual losses consistent with the worst historical experience. As such, Fitch does not anticipate significant rating volatility in the event of a GM bankruptcy. However, if residual value deterioration is worse than expected in the near-term or protracted, impairing transactions' ability to build credit enhancement, rating actions may be necessary.  

Fitch also expects the GM filing to have a negative effect on new-vehicle sales levels at existing dealers, weakening the financial profile of the franchised dealer base and potentially increasing dealer bankruptcies. Furthermore, GM's filing may accelerate the phase out of certain brands already indicted as part of their overall restructuring plans, potentially putting respective dealers under additional financial distress.  

However, the targeted dealers generate a fairly small portion of GM's overall new vehicle sales. Additionally, GM has indicated its intention to orderly phase-out dealers through the year and support existing inventories. Given the government's 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 a short-term basis. Should this occur, the overall negative impact the dealer floorplan ABS may be limited.

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