GMAC's tight lending squeezes GM's sales

DETROIT (Reuters) - Lending company GMAC LLC's decision to pull back from riskier car loans will add to the pressure on General Motors Corp GM.N at a time when the top U.S. automaker desperately needs to regain sales momentum.

GMAC, now controlled by Cerberus Capital Management CBS.UL, has begun giving car loans only to buyers with the best credit scores as the global financial crisis strains GMAC's access to capital.

This has cut access to GMAC loans by some 25 percent of the potential car buyers in the United States and shows how the interests of GM and the finance unit it founded almost 70 years ago have diverged, analysts said.

"It was feared by some investors that if GM lost operating control of its captive finance operation it would ultimately adversely impact the company's automotive business, which appears to be true," Buckingham Research analyst Joseph Amaturo wrote in a note for clients.

GMAC said on Monday it would only lend to consumers with a credit score of 700 or above. Combined with an earlier decision to curtail leasing, that could cut GM's U.S. market share by up to 2.5 percentage points in 2009, Amaturo said.

GMAC, 51 percent owned by Cerberus Capital Management which also owns Chrysler LLC, financed 43 percent of GM's vehicle sales in the second quarter.

GM has been particularly hard hit by the downturn in U.S. auto sales, which are at 15-year lows. GM's sales are down 18 percent for the year, and its U.S. share is below 23 percent, nearly half of its 1980 peak.

GM's current restructuring is based on an assumption that the company can hold its share of the U.S. market at 21 percent. Analysts said the lack of financing from GMAC would make it harder for GM to stand its ground against better-capitalized competitors.

"In today's market its more and more difficult to maintain good credit," said Global Insight analyst Rebecca Lindland. "It's just another pressure on the consumer and GM."

Banks and other financial institutions have become increasingly wary of underwriting auto loans and leases. Chase Auto Finance has slashed its auto lease underwriting, and Capital One Financial Corp (COF.N) has said it would end financing some auto dealer inventories in New York and New Jersey.

GMAC has also said it raised the rate it charges car dealers for making standard loans by 75 basis points.

HARD TO STAY ON COURSE

Carl Galeana, a Saturn and Chrysler dealer based in Warren, Michigan, said the tight lending standards have made business tougher and hurt traffic to the dealership.

"We will have a tough time until the economy improves and consumer confidence improves," he said. "Traffic is declining and credit is getting tougher. All I can do is to manage inventory."

GM, which lost $15.5 billion during the second quarter, is banking on cost cuts and stemming a protracted slide in its U.S. sales to turn around its operations.

It has planned to cut $10 billion in costs and raise another $5 billion cash to weather a sales decline that analysts see intensifying in 2009.

GM has held talks with Cerberus about a merger or other partnership with Chrysler, sources have said. GM sold a controlling stake in GMAC to Cerberus in 2006.

People familiar with the talks have said that under one possible deal, Cerberus would have swapped Chrysler's auto operations for the 49 percent stake in GMAC still held by GM. But one person familiar with Cerberus' thinking said on Monday that the private equity firm wanted to retain a stake in any such merged automaker.

Reports of the merger talks, which surfaced this weekend, have added to the uncertainty surrounding GMAC.

"Who knows? Times change, and we will have to see how that develops," said Maureen Kempston Darkes, president of GM's operations in Latin America, Africa and the Middle East when asked whether the finance firm was an integral part of GM.

The pressure on financing for GM and other brands creates an opening for rivals such as Ford Motor Co (F.N) and Toyota Motor Corp (7203.T), which still have captive finance arms, executives at those automakers said.

To spread the message its captive finance company is still bankrolling deals, Toyota has launched TV ads touting "Saved by Zero" referring to its unprecedented zero percent financing on 11 vehicle models.

Ford's head of marketing and sales, Jim Farley, said the automaker was still able to get loans for most customers through its finance arm, Ford Motor Credit.

"It is a big advantage," Farley said. "I know its a big difference maker for Ford right now."

(Additional reporting by Soyoung Kim and David Bailey in Detroit and Thomas Atkins in Dubai; Editing by Toni Reinhold)