17 May 2010

GM Re-Thinking the Auto Lending Business

Bloomberg / Business Week
General Motors Co. may return to the auto-lending business more than three years after selling control of GMAC LLC, according to three people familiar with the company’s plan.

GM may buy back the GMAC business, start a new finance unit or form a partnership with banks and other lenders, said the people, who asked not to be identified because details are private. Chief Executive Officer Ed Whitacre wants to form an in-house lender before selling shares in GM as soon as the fourth quarter, one person said.

Having a so-called captive credit arm may boost GM’s profit, enable dealers to offer better terms on leases and loans, and make an initial public offering more appealing to investors, said Rebecca Lindland, an IHS Global Insight analyst in Lexington, Massachusetts.

“The IPO is going to be more of a success if they can sell more vehicles than they have been selling,” Lindland said. “They should be able to do that if they can be more aggressive in their financing. Having their own finance company would certainly help.”

Whitacre has his management team exploring all options, the people said. Tom Wilkinson, a GM spokesman, declined to comment.

GMAC is now known as Ally Financial Inc. and is 56 percent owned by the U.S. Treasury after an injection of $17.2 billion under the Troubled Asset Relief Program.

New Name

Meg Reilly, a Treasury Department spokeswoman, had no immediate comment, and Ally’s Gina Proia said an acquisition of its auto-finance business by GM was “speculation.”

“We remain committed to improving our performance, repaying the U.S. taxpayer, and providing our customers - automakers, dealers and consumers alike - with exemplary service and compelling products to meet their needs,” Ally Chief Executive Officer Michael Carpenter said today in a statement.

GM sold 51 percent of Detroit-based GMAC to private-equity firm Cerberus Capital Management LP in November 2006 as the biggest U.S. automaker ran low on cash. Since then, GM has had to rely on outside lenders, including GMAC.

The Federal Reserve approved GMAC’s bid to become a bank- holding company in December 2008, easing the threat of a default that would have further tightened credit for GM dealers as the recession deepened and auto sales plunged.

GM would probably want to acquire only the automotive business from Ally, and not operations such as the former ResCap mortgage unit, said Mark Wakefield, a director at Southfield, Michigan-based turnaround firm Alix Partners.

Alix is winding down GM’s bankrupt predecessor, General Motors Corp., which is now called Motors Liquidation Co. Wakefield said he isn’t involved in any consideration of forming a new finance company.

Retaking Control?

GM retaking control of the former GMAC’s auto-lending operations would require working out a solution with Chrysler Group LLC, which also uses Ally, Wakefield said.

Should GM own more than a 10 percent stake of any of Ally’s lending businesses, the finance unit would have to relinquish its bank-holding company status and wouldn’t have access to the Fed’s discount window for cheap funds, Wakefield said.

“It would take a while to convince the market that GMAC is safe and sound,” Wakefield said. “It will take a while to claw their way to a borrower rate that is competitive.”

Competitors that own finance companies can use in-house lenders to offer more-attractive car loans or leases, boosting sales, according to Colin Langan, a UBS Securities LLC analyst in New York. Ford Motor Co. is among the automakers in the U.S. with its own credit unit.

‘More Aggressive’

“It makes it much easier to do zero-percent financing and you can be a bit more aggressive in who you lend to,” said Langan, who recommends buying Ford shares.

GM also may benefit from having a finance unit that could pump up auto profits. Ford’s first-quarter profit was buoyed by $828 million in pretax operating income from Ford Motor Credit.

Russ Shelton, owner of Shelton Pontiac Buick GMC Inc. in Rochester Hills, Michigan, said GM dealers would welcome an in- house finance arm.

“Probably the biggest missing piece for GM is financing,” Shelton said. “Getting a customer financed today is the hardest thing, even if they have good numbers. I think we could probably overcome some of that with a captive finance arm.”

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