AmeriCredit Faces Difficult Road in Current Marketplace
FORT WORTH, Texas — AmeriCredit's management described the fiscal-year third quarter as difficult despite processes they have already taken to trim dealer relationships, raise minimum cutoff scores, lower loan-to-value and control other credit costs.
In addition to the tighter lending requirements, the company has also been facing a tough capital market when shopping for securitizations, which are vital for business.
Explaining the current environment, Dan Berce, president and chief executive officer, said, "With this credit tightening, our average custom credit score in our core subprime originations increased eight points which had the impact of reducing approval rates to approximately 20 percent from 30 percent. And loan-to-value for our subprime originations decreased approximately 5 percentage points to 115 percent.
"Because of the credit tightening measures we implemented, we expect loans originated in 2008 to show meaningful improvement in cumulative net losses as compared to the 2006 and 2007 vintages," he continued.
Berce went on to explain that the company has reduced its annualized origination run rate to the $3 billion range.
"We believe that this lower origination level will provide us the flexibility to operate within currently available warehouse capacity and liquidity constraints, assuming limited access to the securitization market," he reported.
"While we remain committed to offering a full spectrum of financing options to our key dealer relationships, we will continue to evaluate the profitability and efficiency of our existing partnerships and business lines as we manage origination value," Berce said. "To this end, we have discontinued new originations in our direct lending and leasing platforms as well as certain partner relationships."
In some ways, Berce said the overall credit challenges have helped the company, as other auto lenders pull back as well.
"The industry-wide retrenchment has led to an improved competitive environment, which we were able to take advantage of to tighten credit while maintaining loan pricing," he stated.
"For the remainder of calendar-year 2008, we will look to maintain higher credit standards while seeking to incrementally increase pricing and profitability in certain markets and credit ranges," Berce added.
The company's net income was down compared to the prior year. In fact, AmeriCredit posted net income of $38 million, or 31 cents per share, for its fiscal third quarter, compared to net income of $104 million, or 80 cents per share, last year.
For the nine-month period, the company reported net income of $81 million, or 65 cents per share, compared with $273 million, or $2.06 per share, in the prior year.
Officials noted that net income for the quarter included a $10 million after-tax gain related to the sale of AmeriCredit's investment in DealerTrack Holdings, and a $21 million adjustment to reserves for contingent tax positions.
Additionally, executives said that net income for the nine-month period included a $33 million after-tax gain related to the sale of AmeriCredit's investment in DealerTrack Holdings.
Auto loan purchases came in at $1.33 billion for the quarter, compared with $2.52 billion last year. Loans purchased for the nine-month period totaled $5.51 billion, compared with $5.94 billion in the previous year.
Officials also reported that managed receivables were $15.82 billion, compared with $15.15 billion in the prior fiscal-year period.
Recovery rates remained steady at 44 percent for the quarter when compared to the December period, but down from a year ago.
Speaking to the company's balance sheet, in addition to capital and liquidity positions, during AmeriCredit's conference call was Chris Choate, chief financial officer.
Discussing loss provisions, he said, "We recorded a provision for loan losses of $251 million, or 6.2 percent, of average receivables for the March quarter. The allowance for losses was 5.7 percent at March 31, 2008, compared to 5.6 percent at Dec. 31, 2007.
"The increase in allowance for loan losses reflects our expectation that credit performance, including used-car values, will remain weak through the remainder of the calendar year. Finally, consistent with our approach in the December quarter, our allowance and provision for loan losses does not explicitly assume further deterioration in the economic environment," Choate explained.
He then moved on to talk about funding, indicating that the company had hoped to strike a securitization deal during the quarter; however, the uncertainty in the capital markets made this difficult.
"Over the past several weeks there have been some signs of improvement as several prime auto, equipment and credit card securitizations and one subprime auto securitization have been completed," Choate pointed out.
"So, although the successful completion of these recent deals may evidence improving liquidity in the ABS market, markets generally and increased investor demand for auto dealers specifically, there continues to be uncertainty about effective execution of larger subprime issuances under our AMCAR program," he related.
To mitigate risk, a few weeks ago the company entered into a forward purchase agreement with an affiliate of Deutsche Bank.
"We believe there will be sufficient investor demand for the shorter-date tranches in our securitizations but more limited demand for the longer-dated tranches," Choate explained. "Our plan will be to use the Deutsche commitment primarily for the longer-date tranches in our securitization transactions in order to leverage this commitment and issue more than $2 billion in total securitization notes.
"This will help clear out existing loan inventory on our warehouse lines and free up borrowing capacity," he continued. "Assuming that we fully utilize Deutsche's commitment to purchase unsold notes over the next year, we will realize marginally profitable returns on loans originated during the back half of calendar 2007. We should realize significantly better risk-adjusted returns on loans originated after the credit tightening that began in late January."
Moreover, Choate said that with this forward purchase agreement under the company's belt, the management team will aim at executing an AMCAR securitization during this quarter.
As for existing securitizations, there have been some challenges, Choate noted.
"As we mentioned in our January conference call, three Long Beach securitizations, 2006-A, 2006-B and 2007-A, breached their level on performance triggers. As part of our arrangement with FSA, we agreed to use excess cash flows from our current FSA-insured securitizations to help fund the higher credit enhancement requirements brought on by these trigger breaches," he reported. "Through the April distribution date, $37 million of cash otherwise distributable to AmeriCredit was used to fund the higher credit enhancement requirements.
"We anticipate that we will reach those requirements for our May trust distribution date and will once again be receiving cash distributions from our FSA-insured AMCAR securitizations," Choate predicted.
The CFO went on to indicate that the company is keeping a close eye on the performance of the 2007-2-M APART transaction that was completed in October. He said this attention is largely due to its high concentration of Long Beach collateral.
"Earlier this month we entered into an agreement with another of our securitization bond insurers, MBIA, to increase performance triggers in this APART transaction to provide us more leeway as we continue to experience increased credit pressures in this trust due to the problems we have previously discussed with the Long Beach portfolio," Choate commented.
"In return, we agreed to provide MBIA with a limited-cross collateralization from excess cash generated from securitization transactions insured by MBIA," he added. "In April, $13 million of cash otherwise distributable to AmeriCredit from MBIA-insured transactions was used to fund the target credit enhancement for 2007-2-M. We anticipate that it will take an additional two months and $21 million to satisfy the higher credit enhancement requirements in this transaction."
As for possible future breaches, Choate said, "Assuming that the economic environment does not deteriorate further, we do not currently expect any additional securitization transactions to breach their performance triggers during the remainder of the calendar year."
Reviewing liquidity, Choate indicated that as of March 31, the company had $484 million on unrestricted cash, down from $567 million at Dec. 31 of last year.
"With the cash that will begin to accumulate from the run-off of our $15.8 billion portfolio, we expect to maintain unrestricted cash in approximately the range of $300 to $400 million throughout the calendar year," he said.
In his own words Choate said that embedded in the company's liquidity forecast are the following assumptions:
—"Our origination target for this calendar year will result in run-off of our portfolio of about $3 billion by Dec. 31. This run-off will result in the release to us of about 15 percent in capital supporting these receivables.
—Our subprime warehouse facilities carry an effective enhancement level of about 15 percent. This enhancement level will increase to the low 20-percent range at the time of securitization. Accordingly, the net impact of a securitization would be cash usage of about 5 to 7 percent.
—Soft consumer credit will continue to result in lower distributions from securitization trust and higher delinquencies in unsecuritized receivables.
—Cash trapping under the limited-cross collateralization arrangements with FSA and MBIA will conclude over the next couple of months.
—We will be able to access the securitization market and issue at least $2 billion of FSA-wrapped securitization notes by calendar-year end.
—Warehouse credit facilities that are maturing this year will either be reduced or eliminated.
—We will repay our $200 million convertible notes in November."
He went on to say, "We had available warehouse capacity to support an additional $2.5 billion of originations at March 31. Subsequent to quarter end, we amended our prime/near prime warehouse facility to address a potential covenant violation in the facility related to credit losses in our Bay View and Long Beach portfolios. The size of this facility was reduced to $1.12 billion and the effective advance rate decreased to below 80 percent.
"With this amendment, we are in compliance with the covenants in all our warehouse facilities, and we have available warehouse capacity to support an additional $2 billion of originations as of today's conference call (April 24)," Choate said.
With the $500 million call and the $1.12 billion prime/near-prime facilities coming near renewal dates in August and September, Choate indicated that AmeriCredit is in talks.
"We are having preliminary discussions with our lenders on the renewals of these facilities and anticipate that one or both of these facilities could be reduced in capacity size or even eliminated," he explained. "However, with our lower origination targets and the freed-up warehouse capacity, we should achieve through securitizations supported by the Deutsche commitment, we should have sufficient warehouse capacity into calendar 2009."
In addition to the consolidation and closing of several branch offices, along with staff reductions, which occurred in March, Choate said more cuts may be made.
"We expect to have some additional staff reductions in the June quarter as we seek to maintain an operating expense ratio in the mid 2-percent range over time even with a declining portfolio balance," he stated.
Choate then turned the conference call back to Berce.
No Future Guidance
With the management more focused on near-term results than long term, Berce explained that the company is no longer providing earnings guidance.
"One final note, given the uncertainty affecting key elements of our financial forecast, including the timing and funding cost of future securitization transactions and the volatility in consumer credit performance, we are no longer providing earnings' guidance," he said. "Instead, through our prepared remarks today, we have set out our outlook for key performance metrics for our business."
Wrapping up the conference call, Berce indicated, "In conclusion, as we continue to navigate through this economic downturn, we remain vigilant in monitoring both the credit and capital markets' environment and will take further actions, if necessary, to conserve liquidity and protect the long-term value of our franchise."
This isn't the first time the company's business model has been tested, he pointed out, saying, "We are confident that the strength and value of the platform will be affirmed on the other side of this economic cycle."