Standard & Poor's Ratings Services said it lowered its long-term counterparty credit rating today for GMAC LLC, the parent of GMAC Insurance, to "CCC" from "B-minus."

The firm said it also lowered the long-term counterparty credit rating on GMAC's mortgage finance subsidiary, Residential Capital LLC, to "CCC-minus" from "CCC-plus," and said both parent and subsidiary are in a "dire situation."

GMAC's subsidiary, GMAC Insurance, provides commercial vehicle, homeowners and recreational vehicle coverage and property and casualty reinsurance programs primarily to regional direct insurance companies.

The S&P ratings on GMAC were removed from CreditWatch Negative, where they were placed Oct. 9, and the outlooks for GMAC and Residential Capital LLC are negative, said S&P.

"The ratings actions follow the companies' third-quarter earnings release that indicates continued intense financial stress at both entities," said an S&P credit analyst, John K. Bartko.

According to the S&P analysis, GMAC's consolidated $2.5 billion loss for the quarter was driven largely by Residential Capital LLC's loss of $1.9 billion.

S&P said that GMAC, absent Residential Capital LLC, continues to be pressured in its core auto finance business by elevated provisioning and overall weak economic conditions.

The rating firm said further that as demand for car and truck products wanes, so have residual values, leading to additional lease impairments.

Residential Capital LLC represents a significant economic burden for GMAC, and S&P does not anticipate the financial pressure at Residential Capital LLC dissipating in the intermediate term. S&P added that "a strategic solution appears the only option within this time frame."

In the mortgage business, losses have placed Residential Capital LLC "perilously close to its tangible net-worth covenant limit, with a $100 million cushion"--the calculation of which excludes GMAC Bank, S&P found.

The analysis noted that the company's quarterly report said Residential Capital LLC's status as a going concern is in "substantial doubt" absent economic support from GMAC.

According to S&P, de-leveraging is now less of an option, as asset sales result in losses that threaten the tangible net worth covenant, and broader economic and housing-related trends are not currently accommodative.

Compounding this issue, S&P found, are a dearth of revenue opportunities and the negative impact of foreign currency exposures. The company, S&P noted, is examining other options for reducing risk and enhancing capital.

GMAC is considering various options, according to S&P--including applying for status as a bank holding company so it could access federal funding, a potential debt exchange, and accessing federal liquidity programs where possible.

But analysts said it is unclear as to the likelihood of achieving any of these alternatives, or if any of them would lead to financial stability for GMAC or Residential Capital LLC.

S&P said if GMAC employs a debt exchange "that we deem to be a distressed exchange, we would lower our rating on GMAC to 'SD' (selective default)."

S&P said Residential Capital LLC's status as an ongoing concern as explicitly acknowledged in GMAC's earnings presentation is highly contingent on support from GMAC.

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S&P Cuts GMAC Credit Rating Calls Situation 'Dire'

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