GM deal looks to pave way back to lending dominance

Thu Aug 16, 2012 3:26pm EDT

Aug 16 (IFR) - Riding a rebound in auto sales, General Motors this week shored up the capital of its financing arm with a US$1bn bond issue, as the fallen Detroit giant, battling back from bankruptcy, tries to rebuild the lending business it sold off six years ago.

GM Financial issued a US$1bn 4.75% five-year note, with 30% of the deal sold to investment-grade bond buyers despite the double-B rating. GM Financial was a sub-prime lender known as AmeriCredit before General Motors bought it in 2010.

The deal lured investors seeking exposure to GM, whose bonds have not traded publicly since the iconic US automaker went bankrupt.

It was also announced this week that GM is looking to buy back the international lending business of Ally Financial , which was formerly GM's own financing arm GMAC before the company sold it in 2006.

A successful purchase of about US$30bn in Ally's assets would more than double GM Financial's consolidated assets, and help move the company closer to its goal of expanding its business beyond sub-prime auto lending.

It would also be the automaker's biggest step yet along the road of returning its financing business to the investment-grade market, where it can access the cheaper funding it needs to start lending to prime auto customers and take advantage of a resurgence in the sector.

US new auto sales rose 8.9% to 1.15m new cars and light trucks in July, equivalent to an annual pace of 14.1m -- up significantly from 12.1m units sold in 2011.

"Everyone is trying to get back into the business, because US sales volume has increased and used car volume has also come off of its lows hit in 2008/2009," said Mohak Rao, director of US financial institutions ratings at Fitch.

TWO WAYS OUT

Both GMAC and Ford Motor Credit Corp fell from grace several years before the 2008 financial crisis and descended into the junk bond market, as their parents' sales slumped behind those of more dynamic and cost-efficient competitors such as Toyota.

But the two automakers adopted different comeback strategies -- and GM has been the slower of the two to make a full recovery. Ford held on to FMCC, which has already clawed its way back to high-grade status and is set to earn its parent a pretax profit of around $1.5bn this year.

For its part, GM sold off a majority stake in GMAC in 2006 to private equity firm Cerberus, and what eventually became Ally continued to provide loans to GM auto buyers.

By 2010, however, GM wanted to get back into the business and bought AmeriCredit Corp for US$3.5bn, so it could reach borrowers with troubled credit histories. Although a top sub-prime auto lender, GM Financial is tiny compared to Ally, and generated a net profit of only around US$249m in the first half of this year.

GMAC, like Ford Motor Credit, was one of the biggest global bond issuers in the 1990s and early 2000s, and both dominated auto lending in the United States.

GMAC became majority owned by the US government after the bailout during the crisis, and is still 74% owned by the US Treasury. GM still owns about 9.9% of Ally.

Ally has been fighting to get back to investment grade itself, recently sending its mortgage lending arm ResCap into bankruptcy and selling off international assets to try to lower funding costs and pay off the government.

Ally has thus far received 32 bids for its international business, amid a scramble to get deeper into the auto lending business. Santander has increased its presence in US auto lending; Toronto-Dominion Bank bought Chrysler Financing in December 2010; and traditional commercial lenders like JP Morgan, Capital One and Wells Fargo have aggressively expanded their presence in the sector, while smaller specialty finance companies backed by private equity money are also popping up to get into the game.

For GM, buying back Ally's international business would give it the chance to profit from loans to buyers of its own vehicles in Canada, Mexico, Latin America and Europe. About 97% of Ally's international new vehicle dealer inventory financing, and 82% of its new vehicle consumer auto financing, has been for GM dealers and customers.

According to Fitch, GM's purchase of Ally's international portfolio could also have implications for its relationship with Ally, which has a longstanding contract to provide above-prime loans to GM auto customers in the US.

The contract expires in December 2013, and if it had the former GMAC international operations back in its stable, GM could also decide to bring its US lending business back into the fold -- especially if it's returned to investment-grade status by that time.

Chrysler has already told Ally it won't renew a similar contract when it expires in April 2013. With the demand for auto lending so hot, and given the low-coupon environment and its improving financial condition, GM Financial could also decline to renew the Ally deal.

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