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GM rebuilds credit, readies IPO

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GM rebuilds credit, readies IPO

Donna Harris

Automotive News -- July 26, 2010 - 12:01 am ET

General Motors Co.'s acquisition of subprime lender AmeriCredit Corp. for $3.5 billion later this year could be the first step toward creating a full-blown captive finance company.

AmeriCredit lacks the capital of other automakers' finance arms, and it's primarily a used-vehicle lender serving borrowers with risky credit. But GM praised its strong management and staying power, calling AmeriCredit the "core" of GM's in-house finance operation.

GM now has Ally Financial Inc., formerly GMAC Financial Services, for floorplanning and most prime financing and AmeriCredit for some leasing and to buy deeper to serve customers with lower credit scores. This gives GM dealers nearly the coverage that Ford Motor Co. dealers get from Ford Motor Credit Co.

The AmeriCredit acquisition will allow GM to sell more vehicles in North America -- perhaps as many as 20 percent more, some analysts say -- because dealers say Ally hasn't been buying very deep.

The new finance arm will improve GM's "competitiveness in auto finance offerings," CEO Ed Whitacre said in a conference call announcing the purchase last week. The move also strengthens GM's position to launch an initial public offering.

The Reuters news agency reported last week that GM plans to file its registration for an IPO during the week of Aug. 16, just after the date that GM is expected to announce second-quarter results.

Besides possibly allowing GM to sell to more people, a captive can generate its own profits. For example, Ford Credit reported second-quarter pretax operating profits of $888 million.

GM's deal with AmeriCredit came as Ford Credit ran into a temporary financing roadblock.

According to The Wall Street Journal, the Ford captive pulled back a scheduled sale of bonds backed by auto loans in the wake of financial reforms signed into law last week by President Barack Obama.

In a statement, Ford Credit declined to comment.

Such asset-backed bonds, used to raise funds for future lending, are legally required to have credit ratings attached. But rating agencies -- including Moody's, Standard & Poor's and Fitch -- now refuse to allow their ratings to be published, although they continue to make ratings as part of the bond offering. The agencies are reacting to new regulations that make it easier for investors to sue them.

The issue had threatened to freeze such bond sales. But on Friday, July 23, the Securities and Exchange Commission issued a "no action" letter allowing asset-backed bond sales without credit ratings for six months. The Securities Industry and Financial Markets Association credited the move with "avoiding the potential for negative impact on the availability of financing."

For now, the planned acquisition of AmeriCredit leaves GM's partnership with Ally intact, assuring a continuation of floorplan financing for GM dealerships.

'Critical partner'

GM CFO Chris Liddell called Ally a "critical partner." He said the AmeriCredit acquisition is a bid to expand GM's leasing, subprime and Canadian business. He declined to say whether GM was shopping for other finance businesses.

Ally, GM's former captive arm, remains GM dealers' preferred lender for commercial loans such as vehicle inventory credit lines and for retail loans to customers with good credit.

"We look forward to continuing our strong relationship with Ally Financial," Liddell said.

Dealers welcome GM's effort to go after subprime business because the number of consumers with bad credit has swelled in the troubled economy.

"We really don't have the access to subprime financing, and there are so many people now with risky credit," said Martin NeSmith, a Claxton, Ga., GM dealer. "They need to have cars, too."

Over the short term, the transaction has little effect on GM dealers or their relationship with Ally. AmeriCredit was already GM's preferred lender for subprime customers, and the automaker promoted most of its lease programs through U.S. Bank.

Ally wound down its subprime subsidiary, Nuvell Financial Services, last year because of a lack of capital. But Ally says it now is trying to increase its subprime business. GMAC leasing also skidded to a stop in the summer of 2008, although Ally began offering limited lease programs in the second half of 2009.

Full-blown captive?

GM declined to flesh out plans for its new finance arm beyond the subprime and leasing business. Although it clinched the deal with AmeriCredit quickly over the past month, growing a full-blown captive would take time.

AmeriCredit has no experience in the floorplan business -- financing a dealer's inventory, which is an integral component of a captive lender. It offered leases for a short time from 2007 to 2008 but stopped that when funds dried up during the credit crisis.

AmeriCredit's retail auto loan origination business is about a tenth the size of Ally's. In its fiscal quarter ending March 31, AmeriCredit wrote $624 million in loans and earned net income of $63 million.

AmeriCredit's total loan portfolio was $9 billion at the end of the first quarter.

Over its 20-year history, the independent finance company has specialized in subprime credit, targeting customers with credit scores ranging from 500 to 650.

In 2006, AmeriCredit acquired two finance companies, increasing its business to people with fair and good credit. But the subprime segment continues to be its primary business.

Strategic partner

In a statement, Ally said its GM partnership is "strategically important to both organizations" and noted its "high market share."

In the first quarter, Ally provided financing for about a third of the GM vehicles retailed and nearly 90 percent of the GM vehicles in inventory.

The company wrote $6.0 billion in retail auto loans in the first quarter, $4.1 billion for GM vehicles.

"I do see the acquisition of a captive as a very positive move," said Carroll Smith, owner of Monument Chevrolet in Pasadena, Texas. "And GM will use this acquisition to gain additional sales.

"Ally is a very strong and important partner of GM, and it is hard for me to think that AmeriCredit could replace them."

Read more: http://www.autonews.com/article/20100726/RETAIL02/307269962/1142#ixzz0un7G06qe

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Drew Dowdell    5,169

LOL!

I love when a large news item gets buried in a small news item.

This:

Such asset-backed bonds, used to raise funds for future lending, are legally required to have credit ratings attached. But rating agencies -- including Moody's, Standard & Poor's and Fitch -- now refuse to allow their ratings to be published, although they continue to make ratings as part of the bond offering. The agencies are reacting to new regulations that make it easier for investors to sue them.

is worth a story in itself. Basically it says that Moody's, S&P, and Fitch have been making $h! up for years and they haven't got a CLUE as to how to adequately rate these instruments. Now that they have to take responsibility for their ratings, they are not going to allow their ratings to be publish anymore.

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