GMAC in worse shape than rival Ford Motor Credit

THE one bright spot for GMAC used to be its auto lending business. Now that too is dimming.

Declining values of fuel-guzzling pickups and sport-utility vehicles are looming over the lender, adding to its existing problems with souring mortgages through its ailing home loan unit. This leaves GMAC, the financing arm of General Motors, in worse shape than rival Ford Motor Credit, the lending unit of Ford Motor.

And it is unlikely that GMAC can look to GM for help. The auto maker, struggling to cope with a steep decline in sales of pickup trucks and sport-utility vehicles, announced production cuts on Monday. The company has a 49 per cent stake in GMAC after a consortium led by private equity firm Cerberus Capital Management, parent of Chrysler, bought 51 per cent of GMAC in 2006 for about $US14 billion ($14.6 billion).

GMAC, set up in 1919 to provide financing to buyers of GM vehicles, had $US50.8 billion in funds it had lent out for new and used vehicles last year. The lender - a steady source of profits for the auto maker, propping it up during economic downturns - has stumbled in recent times, weakened by the billions pumped into its struggling mortgage subsidiary Residential Capital.

GMAC posted a first-quarter net loss of $US589 million, compared to a loss of $305 million a year earlier.

In addition, falling demand for pickup trucks and SUVs, which make up a sizeable chunk of GM's production mix, amid $US4-a-gallon petrol, should further hurt GMAC.

Faced with these pressures, "GMAC's management is taking the appropriate steps and working hard to strengthen the balance sheet and emerge from this unprecedented economic environment better-positioned for the future," says one Cerberus spokesperson in an email.

The value of petrol guzzlers has declined sharply in the used car market. GMAC is saddled with inventories of thousands of these vehicles as they come off leases or are repossessed from owners unable to keep up with their car payments.

Under car lease agreements, GMAC typically takes vehicles back at the end of the lease period and sells them to dealers at discounted prices based on estimates of residual values, that is, the worth of a car at the end of the lease period.

Lower residual values "will certainly affect a leasing company's expectation in terms of lease contracts," says Tom Webb, chief economist at Manheim, the largest wholesale auction company for used cars. On average, auction prices on trucks and SUVs fell by more than 20 per cent in May compared to a year earlier, according to Manheim data.

"I'm sure they are not getting the residual numbers they are expecting," Mr Webb adds. "Residual values are off by $US1000, $US2000, $US3000 or even more."

Residual value is calculated at the beginning of a car lease and is the primary determinant of monthly payments. Oftentimes, aggressive residual values are used in order to lower the monthly payments through the lease period. This can result in the car being worth less at the end of the lease period than what its residual value suggests.

In other words, the auto leasing company is pushed into selling the car at a loss. And this loss is likely to be exacerbated if accompanied by falling market prices for the car. GMAC does have an agreement to split these losses about 50-50 with GM - up to an undisclosed limit, says one person familiar with the arrangement.

"In looking at greater economic conditions, we are seeing pressure on used vehicle prices, higher fuel costs and a change in customer vehicle demand - all of which may impact our resale of off-lease vehicles," says Gina Proia, a GMAC spokeswoman. "GMAC is monitoring the market conditions closely. We regularly review our lease portfolio."

GM on Monday announced a sale on most of its vehicles starting this week and running through June 30 to clear its bloated inventory. Consumers can get 0 per cent financing for up to 72 months or up to $US7000 in cash on such vehicles as the Chevrolet Silverado. But the interest rate costs behind the 0 per cent financing incentive are borne by GM.

GMAC also faces rising delinquency in loan payments and increasing numbers of repossessions as owners of pickups and SUVs owe more on the car than it's worth.

"Clearly, significant declines in values of used vehicles are putting pressure on GMAC's lease and loan portfolio," says Mark Wasden, a debt analyst at Moody's Investors Service.

One worry is GMAC's high level of leverage, or borrowings, compared to its equity cushion. A measure of GMAC's leverage ratio, as calculated by Moody's, puts it at 23, meaning the company has 23 times its net worth in borrowings. In contrast, the same figure for Ford Credit is 11.

GMAC's leverage "is an aggressive measure and has negatively impacted GMAC's credit standing," says Mr Wasden.

The company has ploughed more than $US10 billion of debt and equity into ResCap in recent quarters as the mortgage lender has bled red ink stemming from souring risky home loans - moves that have been viewed unfavourably by credit rating companies.

"Today, what we have is GMAC being pulled down by its investments in ResCap that we think have weakened their credit condition," says Mr Wasden.

GMAC has a "substantial exposure to an entity we believe has operational impairments," Mr Wasden adds. "Credit extensions to ResCap reduce GMAC's financial flexibility and increase risk."
To be sure, GMAC does have hefty cash balances of $US14.84 billion on hand - sufficient to see it through the next 12 months, says Mr Wasden. And it has beefed up its loan underwriting and collection practices, leading to delinquency rates falling in the first quarter compared to a year ago, says GMAC's Proia.

But steeper-than-expected declines in residual values are likely to hit the auto finance unit hard.

Companies "tend to plan for these cycles," says Mr Wasden. "But with very rapid declines in used car values, there's an element of deterioration that isn't necessarily expected."

http://www.theaustralian.news.com.au/story/0,25197,23924491-20142,00.html

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GMAC in worse shape than rival Ford Motor Credit