US CREDIT-GMAC, FMCC may suffer on auto loan delinquencies
NEW YORK, Oct 19 (Reuters) - Rising delinquencies by borrowers of prime auto loans may cut into profits at GMAC LLC and Ford Motor Credit Co (FMCC), and potentially hinder improvement in the credit spreads of the auto financing companies.
The percent of borrowers of prime auto loans that are more than 30 days delinquent on the debt has risen to more than 2.5 percent, according to JPMorgan.
"We expect the severity of auto financing losses to grow due to extended financing terms, increased loss per vehicle and a quicker move to repossessions," JP Morgan analysts Eric Selle and Atiba Edwards said in a report.
"We believe the core assets of Ford Motor Credit and GMAC are sound and they have sufficient liquidity," they said. "However, we expect higher U.S. prime auto borrower defaults over the next 18 months to cause GMAC's and Ford Motor Credit's profits to decline and their leverage to rise."
In addition, auto sales are likely to remain weak over the coming six months as large mortgage resets, fewer home owners borrowing against their home equity and higher fuel and food costs reduce the liquidity of consumers, JPMorgan said.
JP Morgan changed its recommendation on GMAC and Ford Motor Credit's bonds and credit default swaps to "hold" from "buy."
GMAC's credit default swap spreads have rallied from as wide as 697 basis points on August 20 to as tight as 314 basis points last week, before widening back to around 508 basis points on Friday amid a broad credit sell off.
Ford Motor Credit traded as wide as 655 basis points on August 16 before rallying back to 354 basis points last week. The swaps widened back to around 447 basis points on Friday.
Brad Rubin, senior auto sector trading specialist at BNP Paribas, agreed that the finance companies will see their margins contract, however views Ford Motor Credit as still having the potential to see its credit spreads significantly tighten.
"They're not financing as many vehicles as they were before as a result of production declines and the cost of capital has increased," Rubin said. "For them to lend money it's going to cost more money to procure those funds so the margin will certainly be squeezed."
However, "when you look at this after Ford renegotiates its contracts, along with its restructuring, it's going to be a stronger company," Rubin said. "There will be ratings upgrades, so inevitably things are going to be tighter."
Ford Motor Co (F.N), which is in the midst of a four-year turnaround plan, is negotiating with United Auto Workers (UAW) union members, who are seeking to negotiate a contract similar to one the union made with General Motors Corp GM.N.
This contract protects wages, pensions and health care for UAW-represented workers while establishing trusts that would take over responsibility for retiree health care.
The impact of auto loan delinquencies on the finance companies' balance sheets is unlikely to be significant, Rubin said. "Over the long term, between now and the end of first quarter 2008 I think there's going to be significant amount of tightening from where we are today (on Ford Motor Credit)."
Rubin was less sure that GMAC will see its spreads improve, however, due to the finance company's exposure to subprime mortgages via its residential mortgage arm, Residential Capital LLC.
"I can't say that with conviction just because of the ResCap issue. I don't necessarily think GMAC's going to have significant upgrades until we get further clarity on the housing market," Rubin said.
The JPMorgan analysts, however, were comfortable GMAC has its mortgage exposures under control.
"While we are concerned about the mortgage operations at GMAC, we believe they have aggressively sold down and conservatively reserved for their subprime exposure," they said.
