General Motors is in the midst of rebuilding its long gone GMAC financial empire that collapsed into bankruptcy during the Great Recession. The new entity, General Motors Financial, appears to be an exact duplicate of the auto-lending arm of GMAC (subsequently renamed Ally) without the housing lending risks that sunk the company.
Ally recently said that GM would offer subvented leases on several of its popular brands exclusively through GMF. According to Fitch Ratings, this increases the number of problems facing Ally and the auto finance industry more broadly, including “normalizing credit performance, intense competition and pricing pressure, as well as elevated regulatory and litigation risk.”
It, however, appears to be a smart move on GM’s part, one that mirrors other global auto manufacturers’ reliance on captive financing. Well, that is until another downturn or Great Recession appears. Fitch says a larger GMF increases the likelihood that GM could need to provide extraordinary financial assistance “in the case of a liquidity event at the subsidiary.” Such an event would have the potential to place downward rating pressure on GM. There is also an un-quantifiable regulatory risk for GM as government regulators scrutinize its lending practices particularity in the sub-prime market.
The rationale for GM’s lease internalization in Fitch’s view is largely driven by the strategy to sustain strong unit sales and earn an attractive net lease yield. GM said it believes the company could better control its options for retaining customers at the end of leases through its own financing arm.
Fitch agrees that leasing is an important strategy for auto firms to build brand loyalty, as lessees are more likely to lease or buy with the same manufacturer. “However, leasing does introduce residual value risk, which requires careful residual value and depreciation policy setting, particularly in the current market where used car values remain high but are expected to moderate.”
