General Motors Co., burned in the recent past by the fallout from subprime mortgage lending, has bought a company that specializes in lending money to car buyers with poor credit ratings.
The auto giant will pay $3.5-billion (U.S.) cash for AmeriCredit Corp. , a Fort Worth, Tex.-based company that has 800,000 customers and $9-billion in loans outstanding. The two have worked together for the past couple of years to provide subprime loans to car buyers, but now GM will take over full ownership.
The idea, GM chief executive officer Ed Whitacre told analysts on a conference call Thursday, is to expand the financing options the company can provide to customers.
"Our dealers and customers have said that not having an in-house finance arm hurt our ability to finance certain loans and leases, which in turn hurt our sales," Mr. Whitacre said. "Now we are going to fix that."
In addition to making subprime loans, the AmeriCredit operation will also offer leases to GM customers.
While lending more money to subprime borrows may seem like a risky proposition given the experience of the U.S. real estate industry, Canadian auto analyst Dennis DesRosiers notes that AmeriCredit is considered one of the best companies in subprime car lending, and it has a proven track record. "[GM]is joining up with the best-in-class, and that is usually a good sign."
Mr. DesRosiers said there is "a lot of action in that end of the market," so if subprime loans are properly managed, "they can be very profitable. … Just because it is subprime doesn't necessarily translate into high risk."
GM's chief financial officer Chris Liddell said the deal should expand the proportion of GM car sales that are financed by subprime loans, from the current 4 per cent level to around 5 or 6 per cent. Leases, now at 7 per cent of sales, will also expand but not to the 21-per-cent average that other car companies reach, he said. GM cut back on its leasing when it ran into financial trouble and fell into bankruptcy protection last year.
GM customers that have good credit ratings get loans from banks, or from Ally Financial - the former GMAC Financial Services Inc. GM sold its control stake in GMAC in 2006 but it still has links with the company.
The deal with AmeriCredit is also expected to make GM more attractive to potential investors as the company prepares for a share sale, expected some time this fall. "[It will]enhance shareholder value if and when we move towards an IPO," Mr. Liddell said.
The U.S. government now owns about 61 per cent of GM, while the Canadian and Ontario governments together hold 11.7 per cent. These holdings would likely shrink after an initial public offering as the governments would have a chance to cash in their holdings.
GM said leases and subprime loans will not be offered in Canada for the time being, but the company sees Canada as an underserved market for that kind of lending and will consider expanding AmeriCredit's operations here in the future. AmeriCredit has a call centre located in Peterborough, Ont., but it mainly serves U.S. customers. The company did offer subprime loans to Canadians in the past, a GM spokeswoman said.
Ken Elias, a partner with U.S. automotive consulting firm Maryann Keller & Associates, said the purchase of AmeriCredit could be GM's first move to rebuild a much larger in-house lending institution. "My belief is that they are going to expand AmeriCredit into becoming a full-fledge captive [financing arm]of GM over time."
He noted that AmeriCredit made it through the recession intact, which is a positive sign. "The subprime business can be a good business," he said, but most cars are not bought by people with poor credit ratings, so it would make sense for GM to use this as a platform to expand much more broadly into the financing business.