General Motors, in agreeing to acquire AmeriCredit Corp., has reshaped the auto finance landscape.
In this one move, GM solves its financing dilemma, freeing it from the whims of outside providers of financing and returning it to arguably its most profitable historical endeavor: vehicle finance.
Meanwhile, AmeriCredit jumps to the top of the auto finance heap with its marriage to GM. The venture gives it access to a deluge of applications, and offers a clean and profitable “capital event” for its senior management team and investors, both of which have been to the brink and back since the credit crisis began. This is a well-deserved reward for the ACF team. At the height of the credit crisis, there were obituaries prepared for the company. (Heck, we weren’t sure the company would make it at one point.) And now, the plumbest of plumb asssignments: captive finance arm for GM.
There were a host of auto finance companies pining for the GM captive business, including several major banks, who argued that their cost of funds would be lowest. Obviously, GM is betting that it can earn more from owning a captive than a finance partner can save it through more efficient funding. In fact, credit costs have remained sufficiently low so that even AmeriCredit has been able to originate at reasonable funding costs.
The silver lining for GMAC/Ally? That it executed its rebranding before the announcement and that it has had time to rebuild its business into something other than GM’s captive. Ally’s been originating at a torrid pace in recent months, and we believe GM-derived business is at least responsible for some of that. It remains to be seen just how much business Ally will lose to the new GM captive. GM officials in a call with analysts and media repeatedly stressed that the company would continue to work with Ally. We wonder whether that will hold true over the long term.
AmeriCredit, as GM’s captive, does face some challenges. It might be difficult for ACF to navigate the GM-captive push/pull. As a captive, it will be pressed to move the metal and forgo net interest margin, not a comfortable mindset for an enterprise that has been obsessively focused with profitability and earnings performance. Further, at the least, GM had a hand in GMAC’s implosion. While it is doubtful the new GM captive will venture as far from auto finance as did GMAC, there is the possibility of a certain imprudence that could dampen the end results for the new captive.
These are minor hurdles to AmeriCredit, a firm that has been steeled by the credit crisis. Despite any potential political maelstrom as a result of buying a finance company –and a subprime lender, no less — while still on the government’s dole to the tune of a 61% stake in the company, GM has taken the bold step of returning to the finance arena. The company, and arguably the automotive industry, will be the better for it.
More Coverage:
General Motors, in agreeing to acquire AmeriCredit Corp., has reshaped the auto finance landscape.
In this one move, GM solves its financing dilemma, freeing it from the whims of outside providers of financing and returning it to arguably its most profitable historical endeavor: vehicle finance.
Meanwhile, AmeriCredit jumps to the top of the auto finance heap with its marriage to GM. The venture gives it access to a deluge of applications, and offers a clean and profitable “capital event” for its senior management team and investors, both of which have been to the brink and back since the credit crisis began. This is a well-deserved reward for the ACF team. At the height of the credit crisis, there were obituaries prepared for the company. (Heck, we weren’t sure the company would make it at one point.) And now, the plumbest of plumb asssignments: captive finance arm for GM.
There were a host of auto finance companies pining for the GM captive business, including several major banks, who argued that their cost of funds would be lowest. Obviously, GM is betting that it can earn more from owning a captive than a finance partner can save it through more efficient funding. In fact, credit costs have remained sufficiently low so that even AmeriCredit has been able to originate at reasonable funding costs.
The silver lining for GMAC/Ally? That it executed its rebranding before the announcement and that it has had time to rebuild its business into something other than GM’s captive. Ally’s been originating at a torrid pace in recent months, and we believe GM-derived business is at least responsible for some of that. It remains to be seen just how much business Ally will lose to the new GM captive. GM officials in a call with analysts and media repeatedly stressed that the company would continue to work with Ally. We wonder whether that will hold true over the long term.
AmeriCredit, as GM’s captive, does face some challenges. It might be difficult for ACF to navigate the GM-captive push/pull. As a captive, it will be pressed to move the metal and forgo net interest margin, not a comfortable mindset for an enterprise that has been obsessively focused with profitability and earnings performance. Further, at the least, GM had a hand in GMAC’s implosion. While it is doubtful the new GM captive will venture as far from auto finance as did GMAC, there is the possibility of a certain imprudence that could dampen the end results for the new captive.
These are minor hurdles to AmeriCredit, a firm that has been steeled by the credit crisis. Despite any potential political maelstrom as a result of buying a finance company –and a subprime lender, no less — while still on the government’s dole to the tune of a 61% stake in the company, GM has taken the bold step of returning to the finance arena. The company, and arguably the automotive industry, will be the better for it.
More Coverage:
The negotiations between AmeriCredit and GM will certainly be interesting when it comes to residual values on leases. Subvented residuals move the metal but agreements need to be in place regarding who is responsible for what when the lease contracts terminate. GMAC wasn’t taking the major loss on over optimistic residuals when fuel prices spiked. Of course, Cerberus had bought into GMAC but took most of their losses in the mortgage business. It remains to be seen if AmeriCredit has been acquired to merely do GM’s bidding, or if they will be a “partner” able to stand up for itself.
I’m not exactly sure when the first real signs of GM’s demise began to show. Was it the shut down of Oldsmobile? Was it the payment of 2 billion dollars to Fiat to buy it’s way out of GM’s obligation to buy 90% of Gm stock under a certain set of circumstances? Was it the sale of 51% of GMAC to Cerberus for cash to operate? Was it the dis-allowance of loss carry forwards in 2007 when the world’s largest automaker reported a record $39 billion quarterly loss after three money-losing years forced the company to write down the value of future tax benefits. Was it the halving of their dividend in 2008, years after it should have been canceled in its entirety? That was the old GM. Are we about to go down another familiar path of self destruction?
We have been “assured” that care will be taken to protect end user equity by not flooding the market with rental, fleet and lease vehicles. We’ll see how this new relationship impacts this “commitment.”
Somewhere Leo Burns, GM’s main man in charge of residual values, is wondering if he is about to be overwhelmed?