GM, Chrysler Aim to Return to Captive Lending

By Chris Haak

We reported several weeks ago that GM was interested in either buying a captive-finance arm or establishing a new one.  You see, since GM sold a majority interest in GMAC to Cerberus (a year prior to Cerberus’ star-crossed Chrysler acquisition), the one-time world’s largest automaker has found itself at a disadvantage relative to many of its rivals:  because it no longer owned (or even controlled) GMAC, it could not offer the same kinds of competitive new-vehicle finance deals that the likes of Ford, Toyota, and Honda were able to.

GMAC was burned, and burned badly, by the mortage meltdown.  Its ResCap mortgage arm, which sold a ton of mortgage to ill-qualified subprime borrowers that in turn could not make the required payments, may still end up in bankruptcy protection.  Attempts to shore up GMAC’s balance sheet meant that the lender had little interest in issuing auto loans to subprime borrowers.  Their executives were mumbling something about, “once bitten, twice shy.”  This proved unhelpful to GM – and Chrysler – as both automakers had been leaning on GMAC as a de-facto captive finance arm, albeit one with its own best interests at heart, and not those of a parent automaker.

One option that GM had reportedly explored was buying back GMAC’s (now Ally’s) auto-lending operations.  Upon further study, however, GMAC had no interest in selling it back.  With the high upfront costs of setting up a new captive-finance arm, it appeared that GM would continue to pursue its strategy of alliances with various banks, credit unions, and smaller lenders to finance its dealers’ floorplan loans and customers’ new-vehicle loans.

Instead, GM announced this week that it is purchasing AmeriCredit for $3.5 billion in cash.  AmeriCredit has already been providing subprime loans to GM customers since September 2009, and does not yet have the capability of offering floorplan financing.  Currently, Ally Bank (nee GMAC) provides floorplan financing to 90 percent of the GM vehicles in dealer inventory and finances about a third of all GM vehicles retailed.  Ally, however, has focused on prime borrowers after the financial crisis, and that move forced GM to look elsewhere – such as AmeriCredit – for lenders willing to lend money to those with lower FICO scores.  It sounds great in theory to say that you’re only willing to lend money to those with good credit, but doing so eliminates many, many otherwise-qualified buyers from even considering your products.

GM’s purchase of AmeriCredit has already been approved by both firms’ boards, and the deal should be finalized shortly after AmeriCredit’s shareholders cast their vote to approve the transaction.  GM’s offer added about a 25 percent premium to the AmeriCredit’s closing stock price the day before the deal was announced, so its shareholders stand to earn a tidy return for accepting GM’s offer.  GM is making no secret of the fact that it plans to use AmeriCredit as a springboard into a full-fledged captive lender.  Meanwhile, former captive lender GMAC Ally is sitting on the sidelines, calling GM “an important partner.”

Across town, Chrysler Financial finds itself in the odd position of receiving a death sentence – no longer issuing auto loans and no longer the captive-finance arm of the company that shares its name – yet refusing to die.  Chrysler Financial was deemed to not have the means to issue large loans to auto dealers, thanks in large part to tanking used-car prices in 2009, and obviously served as the lienholder of a substantial number of used cars who were on the books at values considerably higher than their actual value.

Fast-forward to mid-2010, and the once-winding-down Chrysler Financial is enjoying the strong Cash-for-Clunkers-fueled resurgence in used-car values.  Many cars are worth more today than they were a year ago, so Chrysler Financial is putting feelers out to gauge interest in potentially providing new-vehicle loans again.  Issuing feelers is different from issuing loans, and Chrysler Financial’s prospects for winning over the hearts of skeptical dealers are far from a sure thing.

One hurdle that both a rejuvenated Chrysler Financial and AmeriCredit might encounter from skeptical dealers is a resistance to change floorplan lenders; tightening credit standards in 2008 and 2009 resulted in many dealers losing their floorplan loans as lenders became skittish.  Therefore, those who held onto their floorplan loans or did manage to find new providers are understandably reluctant to end a relationship that they currently have for the uncertainty of a new floorplan lender.  Currently, Ally finances 42 percent of Chrysler retail sales and 76 percent of Chrysler dealers’ floorplan loans.

Clearly, in both GM’s and Chrysler’s situations, the retail marketshare and floorplan marketshare are Ally’s to lose.  At least in the case of subprime loans, it appears that is what is happening, but it remains to be seen what happens to other lending as AmeriCredit becomes more integrated with GM’s operations and becomes a more full-service captive finance company.  My guess is that Ally’s lending operations will shrink dramatically over the coming years.

Author: Chris Haak

Chris is Autosavant's Managing Editor. He has a lifelong love of everything automotive, having grown up as the son of a car dealer. A married father of two sons, Chris is also in the process of indoctrinating them into the world of cars and trucks.

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