December 30, 2008 - GMAC, Detroit MI

GMAC Makes It Easier to Get a Car Loan

The day after it received $6 billion in capital from the federal government, GMAC, the financing affiliate of General Motors, began aggressively trying to draw consumers back into dealerships on Tuesday.

GMAC said it would begin making loans immediately to borrowers with credit scores of 621 or higher, a significant easing from the 700 minimum score the company started requiring two months ago as it struggled to stay afloat. And G.M. said it would offer a new round of low-rate financing, including zero percent interest on some models.

The infusion of capital from the Treasury Department late Monday was seen as critical for both GMAC and G.M., which relies on the lender to finance car buyers and dealer inventories. GMAC is jointly owned by Cerberus Capital Management, the private equity firm, and G.M.

The Treasury will buy $5 billion worth of preferred shares in GMAC as part of the $700 billion financial rescue known as TARP, for Troubled Asset Relief Program, and it will lend $1 billion to G.M., which, in turn, will invest $1 billion in GMAC.

By providing aid to GMAC, the government will help the company meet requirements for becoming a bank holding company, which would be regulated by the Federal Reserve. GMAC needed to be a bank holding company before it could receive TARP funds.

Policy makers appear to believe “that it will be less expensive to provide $6 billion of financial support than face a situation where car dealers and car purchasers don’t have the funding that they need to carry on business,” said Sean J. Egan, managing director of Egan-Jones, a credit rating firm.

Though G.M. has been heavily advertising the availability of financing from local credit unions and other alternative sources, dealers have said the credit-scoring restriction had hurt sales by turning down buyers without stellar credit scores.

In November, after GMAC raised credit standards for borrowers, the company financed just 1 percent of G.M.’s sales, compared with as much as 45 percent in a normal month, according to Brian A. Johnson, an analyst at Barclays Capital.

By lowering its minimum acceptable credit score to 621, Mr. Johnson estimated that GMAC should be able recapture about a third of its former loan volume. The median credit score in the United States is 723, meaning half the borrowers have a higher score and half have a lower score.

“It’s a strong signal that GMAC is back in the game, and that G.M. dealers are back in the game of financing vehicles,” Mark LaNeve, G.M.’s vice president for North American sales and marketing, said in a conference call on Tuesday.

This month, when the Bush administration said it would lend $4 billion each to G.M. and Chrysler, attention turned quickly to the problems of GMAC, given its importance to G.M.

At the time, GMAC said the Fed would allow it to become a bank holding company only if the company were able to increase its capital to $30 billion. To meet that target, the company said it would have to raise $2 billion in fresh capital and convince approximately 75 percent of bondholders, holding $38 billion in debt, to forgive some of the principal they were owed and accept preferred shares.

On Dec. 16, the company said 58 percent of the bonds issued by GMAC and 37 percent of the bonds issued by its subsidiary, Residential Capital, had been tendered.

On Wednesday, GMAC said it had raised $21.2 billion in a debt-for-equity swap, far short of its goal. GMAC said it had raised $17.5 billion in the exchange offer and Residential Capital had raised $3.7 billion.

GMAC’s approval to become a bank holding company was contingent on the its ability to raise more capital, some of which the Treasury provided a few days later.

“If they hadn’t acted pre-emptively prior to the final deadline for the exchange offer, which would have put into doubt the bank holding company status, I think the health of the global financial market would be in question,” said David Bullock, a managing director at Advent Capital, a holder of GMAC bonds who encouraged the company to become a bank holding company last fall.

Some large investors like the Pacific Investment Management Company, or Pimco, did not tender bonds, arguing that Cerberus should have to put more money into the company if bondholders were being asked to forgive debt.

Analysts said the $1 billion the Treasury lent to G.M. likely helped GMAC raise enough capital to meet the Fed’s requirements. Furthermore, GMAC said on Tuesday that Cerberus would contribute $250 million in new capital and G.M. and Cerberus together would provide another $750 million through the exchange of debt held by the two parent companies, bringing the total amount of new capital to $2 billion.

“They were having trouble raising that $2 billion of equity that the Fed wanted, and so TARP saved the day,” said Richard Hofmann, an analyst at CreditSights, a research firm.

Still, some analysts questioned the Treasury’s decision to inject money into GMAC, saying that the company had lost nearly $8 billion in the last 15 months. Many of its losses stem from an expansion into the mortgage market during the recent boom, but losses are also rising on auto loans.

Original Story - New York Times

Update - January 3, 2009

For Bailout Money, GMAC Agrees to End Deal With GM

The auto financing giant GMAC relinquished its exclusive right to provide financing to people buying General Motors vehicles in exchange for up to $6 billion in federal aid.

The deal abruptly ends a 10-year contract between GM and GMAC, according to the lender's filing with the Securities and Exchange Commission yesterday. In the past, whenever GM offered vehicle financing and leasing specials, such as below-market interest rates, it did so through GMAC. The lender paid an annual fee to GM for the exclusivity and was required to meet sales targets.

Now, over the next two years, the automaker can offer incentive programs through other lenders under certain requirements, the filing said. After that period, the terms will gradually loosen until 2013, when GM will have the right to offer programs through any lender -- including GMAC -- without any restrictions or limitations.

The agreement also releases GMAC from meeting specific sales targets and the obligation to provide leases.

"I don't see anything negative in this new arrangement, as long as GMAC is still supportive of GM's effort to sell cars," said Jack Fitzgerald, owner of Bethesda-based Fitzgerald Auto Malls.

The changes, effective Monday, follow the Federal Reserve's approval of GMAC to become a bank holding company, making the lender eligible for a slice of the Treasury Department's $700 billion financial rescue package.

Chrysler Financial, that automaker's credit arm, also has applied for aid under the Troubled Asset Relief Program. Yesterday, Chrysler said it received a $4 billion loan from the Treasury through the auto rescue package signed into law by President Bush two weeks ago.

Under the GMAC deal, the government received 5 million preferred shares in GMAC that pay an 8 percent dividend -- a larger payout to taxpayers than the 5 percent dividend on its investments in banks -- in return for a $5 billion capital injection in the company. Treasury said it would also lend up to $1 billion to GM so that the automaker would invest in the firm and support its reorganization.

The financial crisis has hit GMAC hard, and losses have mounted in both its mortgage and auto loan businesses. Overall, GMAC lost $5.59 billion in the past three quarters. Unable to find other funding sources and running low on cash, the finance arm shrunk its ability to make loans. GM's auto sales have suffered as a result.

Bank holding status gives GMAC a chance at survival by providing it with access to new sources of funding. But, as a bank holding company, this wholly owned division will also need to change. The Fed has required GM and Cerberus Capital Management, which own the lender, to divest a significant chunk of their ownership because commercial companies are not allowed to own banks.

This week, the company showed signs of healing.

On Tuesday, GMAC said it would make car purchases easier by offering financing to customers with credit scores above 620.

On Wednesday, it completed a complicated debt deal to raise cash needed to help it survive this historic auto sales slump. But it fell short of its goal.

The same day, GM received an initial $4 billion of its $13.4 billion bailout from the government.

Despite this recovery, Fitzgerald said he worried that, as a bank holding company, GMAC might stray too far from its roots. Captive financing companies like GMAC are critical to marketing vehicles in large volumes, he said.

"GM has had all the benefits that Ford Motor Credit provides to the Ford Motor Company," he said. "If GMAC does all that, fine. If it doesn't, GM will have to create another GMAC of its own. It's just the way it is."

Update Story - Washington Post