AmeriCredit Cuts Credit Centers, More, In Response to Hard-Hitting Quarter
FORT WORTH, Texas — Reporting second-quarter results, AmeriCredit announced that it is reducing the number of credit centers and continuing to trim originations in response to increased charge-offs, higher delinquency rates and lower recovery values at auction.
Plainly speaking, Dan Berce, president and chief executive officer, said, "Over the past year, the recessionary environment has accelerated, including increasing job losses, falling consumer confidence, a decline in demand for new and used vehicles, and the scarcity and high cost of funding and capital.
"We do not expect improvement in the macroeconomic outlook in 2009," he indicated in a company statement. "As such, we are focused on maximizing cash collections from our loan portfolio and diligently managing the business to preserve capital and liquidity."
Overall, the company reported a net loss of $25.6 million, or $0.21 per share, for its fiscal second quarter, compared with a loss of $19.1 million, or $0.17 per share, for the same period a year earlier.
For the six-month period, AmeriCredit posted a net loss of $27.2 million, or $0.23 per share, compared with earnings of $42.7 million, or $0.35 per share.
Taking a deeper look into AmeriCredit's conference call, SubPrime Auto Finance News discovered some other details.
"Historically, the December quarter is our weakest quarter for portfolio performance," Berce pointed out. "This year was no different."
In fact, he said 31 to 60 days delinquency levels increased to 7.8 percent from 7.4 percent at the end of September. Accounts greater than 60 days delinquent grew to 4.2 percent from 3.6 percent in the previous quarter.
"Additionally, we granted deferments to approximately 8.2 percent of accounts outstanding during the quarter, up from 7.3 percent last quarter," Berce explained. "While we did not relax our deferment policy, more customers are in need of a deferral due to economic strain. We believe that carrying a higher level of delinquency and greater use of deferments will maximize the ultimate collections from our portfolio."
Continuing on, the CEO said his company's portfolio net credit losses were 9.5 percent for the period. Meanwhile, for the six-month time frame, this figure was 8.3 percent.
Recovery rates at auction also took a hit.
"Our recovery rate on repossessed collateral was 37.1 percent in the December quarter, compared to 41.6 percent in the September quarter," Berce reported. "The effect of lower recoveries added approximately 55 basis points to our December net credit loss rate and was driven by the falloff in demand for used vehicles at both the retail and wholesale levels, regardless of make or model beginning in October."
He went on to add, "We have seen some stabilization of auction values since the beginning of 2009, but expect recovery values to be historically weak well into calendar 2009."
Because the company has been decreasing its loan portfolio by reducing originations, Berce said the impact of negative economic factors and recovery rates on credit results is being magnified.
"By the end of calendar 2009, we expect our loan portfolio to decrease from the current $13 billion to approximately $9 billion," Berce said. "Holding all other variables constant, the decline in our portfolio has negatively impacted our December 2008 quarter net charge-offs by approximately 100 basis points and is forecasted to add another 100 basis points to our net credit loss rate by Dec. 31, 2009."
While he does expect some improvement over the March and June quarter, the challenges in the economy and ongoing seasoning of AmeriCredit's portfolio will likely lead these improvements to be less than normally witnessed, the CEO said in the conference call.
"On the originations front, we purchased $321 million of loans during the December quarter, down from $579 million in the September quarter," he highlighted.
Berce also explained, "Early delinquency results of the 2008 vintage originations are promising, and we have continued to increase both APR and net fees we charge. The weighted average coupon on the loans we originated increased to 17.1 percent for the December quarter, compared to 16.6 percent for the September quarter. Additionally, we received net fees of approximately 130 basis points, up from 40 basis points last quarter.
Also, in the last week of January, in response to the tough market environment, AmeriCredit reduced the number of its credit centers from 25 to 13.
"Earlier this week, we made changes to our operational structure in line with lower expected origination volume, including a reduction in our credit center network from 25 offices to 13," Berce said Friday. "We believe that this new organization structure lowers our cost of originations while still providing a high level of service and national footprint for our dealer customers.
"We anticipate maintaining our originations' run rate of up to $100 million a month through calendar 2009," he continued. "Future changes in our origination volume will be dependent on the stability of the securitization and bank lending markets and our ability to access the capital markets at reasonable rates."
Berce then handed the call over to Chris Choate, chief financial officer, who talked more specifically about some of the company's challenges during the quarter.
"First, we recorded a loss of $12 million primarily related to adjustments to the valuation of certain derivative positions we had outstanding with Lehman. The derivative positions relate to certain floating-rate securitization notes, which we hedged to protect net interest margin," he highlighted.
"We were able to replace Lehman as the counter-party on these transactions during the quarter; however, during the time between the bankruptcy filings and when we were able to secure a new counter-party, rates declined resulting in a non-cash charge for the change in fair value of these derivative positions," Choate said.
Secondly, he said the expense for the quarter related to the agreement with Deutsche Bank to terminate the forward purchase commitment came in at $37 million, of which $27 million was non-cash amortization of warrants. Basically, AmeriCredit accelerated the recognition of $20 million in fees related to this.
Moreover, Choate indicated that the company recognized a $38 million gain at the retirement of $108 million of senior notes and the repurchase of $39 million of 2 1/8 percent convertible notes.
Commenting on the company's securitizations, Choate said, "While the two securitization transactions we executed were costly, they allowed us to move aged receivables out of the warehouse lines and permanently fund approximately $1.3 billion of receivables. Based on our current originations' run rate and because the execution of these two securitizations during the quarter, we do not anticipate having to access the securitization market until late 2009, at the latest."
He also noted that the company will continue to closely monitor the TALF program.
Company officials anticipate "that we may breach the 8.5 percent portfolio net loss covenant in our warehouse lines at the end of January."
"We are currently working with our lenders to restructure the warehouse lines and anticipate obtaining a temporary waiver for any non-compliance until an amendment of the lines is completed. We expect that an amendment will result in reduced warehouse capacity consistent with our lower origination run rate, as well as lower advance rates and higher cost of funds more reflective of current market conditions," Choate said.
In concluding the call, Berce said, "Pivotal to our success in navigating 2009 will be restructuring our warehouse facilities to obtain covenant relief in light of the recessionary environment and effect of portfolio seasoning. Once our warehouse line covenants are addressed, we believe our balance sheet will be positioned to effectively weather this economic downturn.
"We will continue to execute our operating strategy which balances our short-term need to conserve capital and liquidity and our long-term goal of protecting the value of our franchise so that we are well-positioned to take advantage of the favorable competitive conditions once the economy improves and liquidity returns to the capital markets," he said, ending on an optimistic note.