WhileAcceptance Corp. is on track to exceed its $2.5 billion income target for 2005, the earnings objective falls short of the record $2.9 billion earned by GMAC in 2004 and would end 10 consecutive years of earnings growth.
Corp.'s financing subsidiary also announces a long-term strategic financing agreement regarding its U.S. automotive retail assets with Bank of America Corp.
The deal, part of a recent trend by GMAC to develop new funding channels, calls for a committed purchase by Bank of America of up to $55 billion worth of GMAC retail automotive contracts over a 5-year period, commencing this month and concluding June 2010.
The transaction is a key building block in the further transformation of GMAC's automotive finance operating model, GMAC Chairman Eric Feldstein says during a conference call with investors and the media.
“GMAC is continuing to transform its automotive finance business from a 'storage' business to a 'moving' business,” Feldstein says.
Historically, GM would originate auto loans through its dealers, store those assets on the GMAC balance sheet and earn the net interest margin.
With margins declining, GMAC is changing its approach.
“We will continue to originate and service auto-financing contracts, but we will 'move' these assets off our balance sheet by selling them to other financial institutions,” Feldstein says.
“But we still are the face for the customer,” he adds.
GMAC, which is capital-constrained and under credit-rating pressure because it is owned by financially beleaguered GM, hopes transitioning to the new business model will free up capital at its Auto Financing operations. It plans to re-deploy the assets at its growing Insurance unit and Residential Capital Corp. (ResCap), a holding company for its residential mortgage businesses.
“If and when we sell (GMAC's) Commercial Mortgage (operations),” Feldstein says, “that too will free up capital as we sell a majority equity stake and re-deploy that capital to ResCap and Insurance.”
GMAC is nearing final agreement to sell a majority interest in the Commercial Mortgage business to a consortium of private investors.
“This is a classic example of where we think owning a minority equity stake in a growing and profitable business is better than owning 100% of a capital-constrained business,” Feldstein says.
“By introducing equity partners, I think the Commericial Mortgage operations will have adequate capital to sustain its growth. Based on the terms of the transaction, GM will benefit from a multi-billion dollar in-flow of liquidity from the sale proceeds and the large inter-company loan re-payment.”
GM Chairman and CEO Rick Wagoner announced in June, at the company's annual shareholder meeting, that GM was considering other strategic alternatives for GMAC, because funding constraints were impeding the financing operations' ability to support the auto maker's sales.
GMAC has been critical to GM's survival the last several years – providing bulk to the profits as the auto maker's North American operations loses market share and struggles with rising health-care costs and funding high incentives.
“The trick is getting enough separation between GM and GMAC introduced such that GMAC can command a higher rating (from credit agencies), but not so much separation that our strong operating relationship is undermined,” Feldstein says.
During the first six months of 2005, GMAC cultivated new funding channels while maintaining a strong liquidity position of $22 billion (as of June 30).
Besides the deal with Bank of America, ResCap has obtained an investment-grade credit rating from the four major rating agencies.
Since then, ResCap successfully has raised $4 billion in a private debt offering and obtained aggregate commitments for an additional $3.5 billion of bank credit lines.
Feldstein says the initiative has created access to cost-effective unsecured funding for ResCap, while providing substantial liquidity relief to GMAC.