GM Survival Plans Raise More Questions Than Answers For GMAC
28 April 2009 - 11:04PM
Dow Jones News
General Motors Corp.'s (GM) potential restructuring plans are
throwing a wrench into GMAC LLC's efforts to change into a stable
bank.
GMAC, the former financing arm of the auto maker, hit with hefty
losses of its own, turned itself into a bank in December. Its goal
was to access federal funds. While its bank status dictates that
GMAC loosen its ties to GM, a big chunk of GMAC's business is
firmly interlaced with the auto maker's fortunes.
As GM shuts down dealers in an effort to save itself, GMAC could
be left with loans to dealers who can't pay them off; moreover,
some changes GM plans, such as killing off the Pontiac brand, could
depress valuations in GMAC's book of leases and loans.
Over the longer term, GM's changes could help GMAC by weeding
out weaker, less credit-worthy dealers.
GMAC funded 32% of the auto maker's retail sales in 2008 and
provided 81% of the financing to GM dealers. The auto maker's
struggles are complicating and undercutting GMAC's efforts to
transition into a bank amid innumerable unknowns brought on by GM's
uncertain future.
"We are in uncharted waters," says Christopher Wolfe, an analyst
at Fitch ratings.
GMAC is jointly owned by GM and an investor group led by
private-equity firm Cerberus Capital Management LP. The auto maker
and the investor group will significantly scale back their
ownership in GMAC as a condition of the lender becoming a
bank-holding company.
GM outlined Monday a new turnaround plan that would leave the
U.S. government controlling the auto maker, as it set up a showdown
with bondholders that could determine whether the company lands in
bankruptcy court. GM told bondholders it wants to swap up to $27
billion in unsecured debt for a 10% company stake. If bondholders
tender less than 90% of the debt, GM is prepared to file for
bankruptcy protection.
Also Monday, the United Auto Workers union and Chrysler LLC
disclosed that the union would own 55% of that restructured car
maker, while Fiat SpA would get 35% and the U.S. and lenders would
own the rest. The government-led restructuring of Chrysler may
include folding the auto maker's former finance arm into GMAC, The
Wall Street Journal reported Tuesday.
These restructuring efforts come against a backdrop of steep
declines in auto sales, an economic recession and rising
unemployment that's crippling the ability of U.S. consumers to
honor their debt obligations.
"With the level of uncertainty, it's really hard to gauge what
will happen," says Wolfe. "A big question we have is 'what will
survive out of GM and what does that mean for GMAC?'"
GM, as part of its turnaround plan, said it would reduce its
U.S. dealers to 3,605 by 2011, down 42% from 2008 - on average
winnowing its dealer ranks by about 130 outlets a month for the
next 20 months.
GMAC lends to GM dealers who typically use these funds to
stockpile new vehicles on their showroom floors. The lender had
$24.13 billion of such loans on its books in 2008. GMAC earned
revenues of $1.4 billion last year on these type of loans to
dealers.
A concern is that shuttering dealerships in a hurried fashion
could leave GMAC stuck with unsold inventory if the lender is
forced to repossess vehicles when dealers can't pay up. In such an
instance, GMAC may have little choice but to auction off the cars,
driving down their prices. Lower prices, in turn, would drive down
values of GMAC's existing books of loans and leases.
This "will have a very negative impact," says Wolfe.
GM also confirmed it would kill its Pontiac brand. Analysts
worry this would lower prices on used Pontiac vehicles as buyers
discount models because of concerns about spare parts, servicing
and warranties.
Values on used cars matter a great deal to GMAC. After leases
expire, GMAC takes the vehicles back and sells them at used-car
auctions, hoping to make a profit. But falling resale values can
force lenders such as GMAC - saddled with inventories of thousands
of these vehicles as they come off leases or are repossessed from
owners unable to keep up with payments - to sell them at a loss.
GMAC took a $1.2 billion impairment charge on its operating lease
portfolio last year.
Yet another concern is the impact on GMAC's lending business as
GM trims down; fewer cars produced could mean fewer cars
financed.
"A significant portion of our customers are those of GM and GM
dealers and other GM-related employees," noted GMAC in its annual
report. "As a result, a significant adverse change in GM's
business...would have a significant adverse effect on our
profitability and financial condition."
- By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729;
aparajita.saha-bubna@dowjones.com