By Don Miller
Contributing Writer
Money Morning
The U.S. Treasury has agreed to lend $6 billion to GMAC LLC (GOM), the financing arm of General Motors Corp. (GM), in the latest government effort to keep the biggest U.S. automaker out of bankruptcy.
GMAC immediately announced looser credit lending standards that could make approximately 60 million Americans eligible for its car loans and leases. The company also said it would expand further into the retail banking industry with plans to access even more funds from the Treasury’s Troubled Asset Relief Program (TARP).
GMAC will “continue to pursue” other ways to boost liquidity, including applying for a Federal Deposit Insurance Corp. guaranty program and attracting retail deposits from consumers, Toni Simonetti a spokeswoman for GMAC told Bloomberg News.
“This is part of our strategy to position GMAC for long-term stability,” said Simonetti. “The reason we’re doing this is so we can provide credit to consumers; we’ll put these funds to use right away.”
The Federal Reserve granted approval on Christmas Eve for GMAC to become a bank holding company – if it could prove it had at least $30 billion in capital. The approval gives GMAC access to financing under the $700 billion TARP Program. To raise that $30 billion, GMAC – owned by GM and Cerberus Capital Management L.P. – convinced about 75% of its bondholders to restructure outstanding debt. Details of that deal were not released.
The agreement represents another new bailout from the Treasury’s TARP program – this time for the auto finance industry. The rescue plan was originally approved by Congress to buy troubled assets from banks. It has since been tapped by the Treasury to prop up investment banks, troubled insurers, and now carmakers and their finance companies.
“Philosophically, I’m not very happy about the fact that the government has to save an auto-finance company because management ran it into the ground,” Thomas Atterberry, who helps manage $3.5 billion in fixed-income assets at First Pacific Advisors in Los Angeles, told Bloomberg News. “The relationship with GM is probably a key reason it’s being bailed out.”
But some analysts applauded the government’s move.
"If you bail out GM, but no one can afford to buy the cars or get financing on the cars, the cars will just sit there on dealers' lots," Scott Talbott, senior vice president of government affairs for The Financial Services Roundtable told USA Today. "This is the other end of the bailout deal."
The new credit standards could allow an additional 60 million borrowers, or approximately 20% of the U.S. population, to qualify for loans.
GMAC said that it would now provide retail financing for car buyers with a score of 621 or more on the FICO scale, a widely-used measure of Americans’ creditworthiness, according to the Financial Times. Credit scores generally range between 300 and 850.
Many analysts draw a line in the sand at 620, considering a score lower than that to be “subprime.” Scores higher than that are considered to be more creditworthy. GMAC had tightened its lending standards two months ago, limiting its financing to customers with credit scores higher than 700.
With its credit rating mired in “junk” territory, GMAC has been locked out of credit markets in recent months. The company only financed 6% of GM’s retail sales in November, as compared to almost 50% a year ago. GMAC did not write a single lease in November.
GM also sought to capitalize on the GMAC rescue by announcing new low-interest and interest-free offers on many of its vehicles, but only if they’re financed by GMAC. Mark LaNeve, the carmaker’s North American marketing chief, said the company is using the incentives “to encourage our customers to get back into the game.”
The new financing is the second step in the government’s General Motors' rescue plan — a crucial hurdle that could have forced it into bankruptcy even after the company received a massive loan approved by the Bush administration.
The investment in GMAC is “part of a broader program to assist the domestic automotive industry in becoming financially viable,” the Treasury said in a statement yesterday (Tuesday).
The funds come on top of the $13.4 billion in loans the government promised General Motors and Chrysler earlier this month.
GMAC will pay an 8% dividend on the Treasury’s $5 billion of senior preferred equity. The company will also issue warrants in the form of additional preferred equity that will equal 5% of the preferred-stock purchase and pay a 9% dividend if exercised.
News and Related Story Links:
- Bloomberg:
GMAC Gets $6 Billion From Treasury to Revive Lending - USA Today:
After getting $5B in federal aid, GMAC expands lending - Financial Times:
GMAC to loosen criteria for loans upon bail-out
Tags: Don Miller