Moody's lowers some ResCap ratings

Moody's Investors Service said it downgraded the senior unsecured bonds of Residential Capital, LLC and Residential Funding of Canada Finance ULC to Ca from Caa1, lowered the subordinated bonds of ResCap to C from Caa2 and affirmed ResCap's $1.2 billion of bonds maturing on June 9 at Caa1.

All ratings remain under review for downgrade.

The downgrade follows the company's announcement of an exchange offer for some of its unsecured bonds. Moody's considers this exchange to be a distressed exchange because the bonds being offered in exchange for ResCap's existing debt are being offered at a discount to par value and will have longer maturities.

The exchange debt being offered will also have second- or third-lien claims on ResCap's unencumbered assets behind a proposed $3.5 billion credit facility that ResCap is negotiating with GMAC. The agency said these claims on ResCap's unencumbered assets will substantially subordinate any existing debt that does not participate in the exchange.

Despite the benefits this exchange could have on ResCap's ability to service its debt, Moody's said the ratings remain under review for downgrade because ResCap has not proven it has a business model that can produce the required operating cash flow to service and ultimately repay these reduced obligations.

The bonds due June 9 were affirmed because they are not part of the exchange, and the company plans to begin a cash tender offer for these bonds at par.

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