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
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
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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