General Motors Co.'s deal to buy a subprime car lender says as much about the state of consumer finance as it does about the auto industry.
Four years after selling a majority stake in what was then called General Motors Acceptance Corp. (now Ally Financial Inc.), the automaker is creating a new captive finance unit through the purchase of AmeriCredit Corp. for $3.5 billion.
Having a captive finance arm again is seen as vital to boosting sales of GM cars as traditional bank lenders tighten underwriting standards and some scale back or quit auto finance altogether. And GM's concerted push into subprime shows how underserved that market is.
"It's hard not to stop and appreciate the utter irony of this after the GMAC divestiture," said Raj Date, the chairman and executive director of the Cambridge Winter Center for Financial Institutions Policy. "But it does underscore that there is a certain amount of business logic to captive finance."
The deal also raises questions about the long-term prospects of GM's relationship with Ally.
The bulk of GM's auto financing is still in prime lending, and executives from the carmaker stressed repeatedly on a conference call Thursday that the relationship with Ally was incredibly important to the manufacturer.
"They are a very strong partner, particularly in the wholesale and prime area," said Chris Liddell, GM's chief financial officer. "We don't see that changing whatsoever. It's important that they're successful from our point of view. It's important that they are strong. It's important that they continue to be in partnership with us, in particular in those areas."
GM still holds a 16.6% stake in the Detroit finance company, according to a regulatory filing. The government holds a 56% stake in Ally, after investing $17.9 billion in bailout funds, and a 61% stake in GM, after the automaker received $50 billion in federal aid during the financial crisis.
Because of the government's investments in both companies, analysts said in the short term GM probably has no intention of jeopardizing its relationship with Ally.
But there is speculation that AmeriCredit could easily ramp up its operations in prime lending at some point.
"They could turn around tomorrow and replicate the prime and floorplan financing through this new vehicle," said Christopher Whalen, co-founder of Institutional Risk Analytics. "But they don't want to kill Ally."
Ally currently funds 88% of GM auto dealer floorplans and 34% of its retail lending, said Gina Proia, a spokeswoman for the lender.
"The long-term partnership between Ally and GM is strategically important to both companies and that is not going to change," Proia said. "We win the business based on our relationships with dealers and on being competitive." In the first quarter, Ally's share of GM's business was four times greater than the next-largest lender.
In April 2006, GM sold 51% of GMAC to a private-equity consortium led by Cerberus Capital Management LP. At the time, GM was already in financial trouble. "They never wanted to sell GMAC," said David Whiston, an analyst at Morningstar. "They were really getting their hand forced because they really did almost go bankrupt in '05 and they needed cash, so I just don't think it was a deal they ever really wanted to make."
Kirk Ludtke, a senior vice president at CRT Capital Group LLC, a Stamford, Conn., investment bank, said the Obama administration "is unlikely to allow either GM or Ally to pursue a strategy that would undermine the other."
In the past year, GMAC renamed itself Ally and has had time to rebuild its business beyond GM by financing sales of vehicles made by Chrysler, Saab and the recreational-vehicle maker Thor Industries. Ally has been originating auto loans at a torrid pace in recent months, but Ludtke attributed that primarily to GM sales.
"It remains to be seen just how much business Ally will lose to the new GM captive," Ludtke said.
AmeriCredit would have to build a sufficient data pool to properly underwrite prime loans, Ludtke said, which would take some time. "That certainly won't happen overnight, so for the time being [GM] will continue to farm out its prime originations," he said. But "it just can't be the case that it will forever give up that spread on prime loans to third-party originators like Ally."
AmeriCredit has relationships with about 4,000 GM dealers, making up roughly 15% of its total business. The Fort Worth company would continue to offer financing to non-GM dealers across the country after the sale closes, which is expected in the fourth quarter.
Observers said GM is likely buying AmeriCredit now, ahead of its planned initial public offering this year, to make itself more attractive to investors and garner a higher share price.
GM and AmeriCredit had little to say about the timing of the deal, but GM executives conveyed a sense of urgency. "Not having an in-house finance arm hurt our ability to finance loans and leases," said Ed Whitacre Jr., GM's chairman and chief executive, during Thursday's conference call. "We realized we had a gap that needed to be addressed."
Whether or not the looming IPO increased the pressure to address the gap, "it's just absolutely ridiculous to be the only automaker in the world without a captive," Whiston said. "GM needs to get itself basically back in line with its competitors and this deal helps that."
According to Cambridge Winter, "direct" auto lenders, those that negotiate directly with borrowers, made up only about 21% of the market in 2007, the most recent year for which data is available. "Indirect" lenders, which work through middlemen, made up 79% of the market. Captives controlled more than half of the indirect channel.
There is also concern that by allowing the deal, the government would implicitly endorse subprime — read: risky — lending. "We've been down that road before and I don't know if that's good for the overall economy," said Dan Seiver, a finance professor at San Diego State University. "I think there's a danger there."
Scott Valentin, an analyst at FBR Capital Markets Inc., said he understood why some people would find it strange that "we just came out of a 'subprime' crisis and now the government is saying 'let's go ahead and do subprime lending for auto.' "
But auto loan losses weren't as severe as they were in mortgages, he said, and an auto lender assumes from the outset that the car is a depreciating asset. "The asset class behaved more like it should historically." Cars also are harder for some borrowers to give up than homes. "You can rent an apartment," Valentin said, "but in most areas you have to have a vehicle."
When Valentin asked on the call if "regulatory" approval would be an obstacle to the deal, Liddell replied: "We don't perceive any issues associated with that at all. ... This is a very clean transaction. It is obviously going to be subject to shareholder approval."
