By on July 22, 2010

After months of speculation about GM’s re-entry into the subprime lending market, The General has announced a deal in which it will purchase the lender AmeriCredit for $3.5b. Founded in 1992, and managing assets worth $10b, AmeriCredit has been pursued by GM for the last month, according to GM CFO Chris Liddell in the WSJ [sub]. GM paid AmeriCredit stockholders $24.50 per share for a controlling interest in the firm, a 24 percent premium over its $19.70 closing price yesterday. Still, GM insists that acquiring AmeriCredit will have “a minimal impact” on its balance sheet, although no explanation is given as to how. $3.5b is at least ten percent of GM’s cash pile at this point, and it’s not clear if that qualifies it as a “minimal impact” or if GM is using some kind of financial instrument to purchase the firm. AmeriCredit says it will “expand its offerings” to support GM, likely in the area of lease deals, but it will also continue to offer loans to non-GM-brand car deals.

Meanwhile, the debate over GM’s re-entry into the subprime market will likely to continue generating controversy. Subprime lending has long been a preferred method of maintaining sales growth through periods of slow demand, but analysts warn that there’s very little that automakers can do to turn around the soft underlying demand for cars. GM’s response [via AP/Google]:

Liddell said that customers could now expect more lease deals from GM. Only 7 percent of its sales are from leases, compared with 21 percent for the industry, he said. Only 4 percent of GM’s sales come from subprime buyers, which the company hopes to expand with its AmeriCredit acquisition.

With 40 percent of the new car market estimated to have a credit score of 620 or under (the definition of subprime), there’s no doubt that GM can move some metal with the help of AmeriCredit. But what if the overall economy and unemployment in particular stay low? If GM signs a load of new subprime loans, default risks could start piling on. And though GM has room to grow its leasing business (particularly at Cadillac), it’s led the industry in cash incentives for most of this year, suggesting that no amount of financial wizardry will restore demand to the levels its looking for. If this deal helps GM wean itself off its incentive addiction, it will have been worth it. If the idea is to pile on incentives, lease deals and subprime loans in order to redline demand for its vehicles ahead of an IPO, GM could be setting itself up for a big fall. And with plenty of demands on its cash already, one big stumble could become a big problem on short notice.

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23 Comments on “GM Drops $3.5b On Subprime Lender AmeriCredit...”


  • avatar
    Astigmatism

    I have no idea what AmeriCredit’s balance sheet looks like, but given the market recently, I wouldn’t be surprised if they had a bunch of loans on their books that they haven’t been able to do anything with, and that GM could securitize enough of them to come up with several billion dollars pretty easily (credit spreads are way, way down vs. a year ago), or otherwise get a loan against the company’s assets. Just think “sign and drive,” but for a $3.5 billion finance firm.

  • avatar
    educatordan

    I’m torn when I read stories like this. I don’t want to see GM fail, I hate to see them risking public money, I wish both GM and Chyrsler had gone through REAL bankruptcies (either Ch 11 or Ch 7), but I also feel like they are going to have to take risks to succeed. Sadly combined with this risk taking is too much of the old ways and attitudes. Sigh, where have the true business leaders gone?

    • 0 avatar
      geozinger

      @dan: Chapter 11 is reorganization.

      Chapter 7 is liquidation. (You really didn’t mean to wish that correct?)

      GM and Chrysler did go through real bankruptcies. In a Ch.11 there needs to be a buyer for the remainder of the company, since the credit markets were fairly wrecked at the time, the govt stepped in.

      The Ch.11 that GM and Chrysler went through were fairly different than other ones, to be sure. IIRC that wasn’t the first time there was a “guided” Ch.11, but I forget who it was that did it first.

    • 0 avatar
      educatordan

      Ch 7, short term turmoil for long term gain. What’s truly worth saving? Hard questions.

  • avatar
    Invisible

    Correction. Government Motors just flushed more tax payer money down the toilet.

  • avatar
    mdwheary

    Looks like the repo companies will see an increase in business soon.

  • avatar
    SkiD666

    I think a lot of people are missing the point, GM just wants to operate the same way as all the other manufacturers (Toyota, Ford, Honda, etc.) when it comes to which customers qualify for borrowing money to purchase new vehicles.
    They are not trying to sell to a different group of customers than anyone else.

    Also, doesn’t having their own in house financing increase the eventual valuation of their stock so that the US and CDN governments can get a better return on their equity in GM?

  • avatar
    Mark MacInnis

    The old, “throw enough sales at the wall and eventually some profit might stick” mentality. Nice.

    $3.5 Billion coming back to the U.S. Treasury rather than being flushed down the squatter might have had a more favorable impact on the economy….

    Your tax dollars at work, America!

  • avatar
    Conslaw

    I’m not so keen on having $3.5 billion of my taxpayer dollars going to buy a subprime auto lender that is a magnet for consumer complaints. There are 22 pages of complaints on the company on ripoffreport.com. http://www.ripoffreport.com/Search/Company/AMERICREDIT.aspx

    On the other hand, it’s suicide to get into subprime lending without experience.

  • avatar
    L'avventura

    Americredit. Not surprised, WSJ talked about the possibility last month, and we know there is an IPO coming soon. So there was an impetus to get this deal done even if it would have been more beneficial to wait.

    This is a company that said it “found itself in a hole and promptly stopped digging” with lending to people with bad credit (score of 300-500). Its bitter coincidence that they will now do under GM what they have worked hard to rid themselves of.

    But you know that this company knows how to gamble being that Americredit is lead by Robert Sturges, who was formerly the Ceo at Nevada Gold & Casinos.

  • avatar
    oboylepr

    GM is like a junkie that just can’t kick the habit. Sub prime lending got GM into a pile of hurt in it’s GMAC days. Sub-prime also caused a great deal of problems for the US and world economies. Why are GM’s masters allowing public money to be used so as GM can make the same stupid mistakes all over again?

  • avatar
    Conslaw

    The subprime auto lending market isn’t the same as the housing market, but there are similarities. For one thing, the auto industry has spiffs that are similar to the “yield spread premiums” in mortgage loans that contributed to making subprime mortgage loans so toxic. Lenders reward dealers for selling the customer on higher interest rates. Perversely, this increases the default rate.

  • avatar
    DrX

    So hold on, GMAC is now Ally and GM has purchased a lender called Americredit. Are they going to call their new captive finance arm GM-Americredit (GMAC)? Because that would be rather amusing.

  • avatar
    Steven02

    3.5B for controlling interest in a company with 10B in assests. I can see why there won’t be too much impact on GM’s balance sheet.

    But, the speculation about if the market stays low really doesn’t matter. GM NEEDS a financial arm. This will help move sales soon and down the road. It doesn’t matter if the market stays low, it will improve its sales.

  • avatar
    Telegraph Road

    Although I work for a Dearborn competitor of General Motors, I think this is a wise move for GM, and t hus for the U.S. Treasury. Dealers want lenders who will approve most of their prime customers and a reasonable fraction of their subprime customers. GMAC, since becoming independent, was not willing to help GM with its subprime customers–and can you blame them?–there’s no incentive for GMAC. Only a captive finance company has the self-interest to fully support the dealer base. My Dearborn employer fully understands this, while the old GM didn’t. The U.S. Treasury should be glad the new GM finally does.

    And for those who may think otherwise, please understand GMAC became a TARP basket-case with its mortgage lending, not its auto sector, which was almost always profitable. Auto subprime has not suffered the same losses as mortgage subprime. Collateral value of autos never declined (except trucks briefly in 2008) as much as housing.

  • avatar
    Robert Schwartz

    Are they going to put one of those green signs up that says this project is funded by the American Recovery Act?

  • avatar
    John Horner

    GM needs to have the same customer financing capability its competitors have, otherwise it will always be at a significant disadvantage.

  • avatar
    Geo. Levecque

    Let’s face it, the only thing that counts with General Motors aka the Taxpayer. is Sales, most important to make lots of Sales to whoever, who cares if the Customer has not enough Money to pay for his new vehicle?


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