AmeriCredit Cuts Originations Two-Thirds by Ceasing Certain Loan Products, More
FORT WORTH, Texas — In AmeriCredit's latest moves to remain nimble in the current market atmosphere, the company's chief executive officer said in a conference call Wednesday that it has reduced originations over last year by two-thirds, ceased originations in Canada, ended leasing and direct lending activities, in addition to suspending production in its prime platform and cutting back on near-prime originations.
During the company's conference call on its fourth fiscal quarter results yesterday, Dan Berce, who also serves as president, explained, "During the June quarter, we purchased $780 million of new originations, which as planned is a significant reduction in volume compared to $1.3 billion for the March quarter.
"Consumer demand for new- and used-vehicle purchases has softened considerably over the past several months. This softening demand, combined with the pullback by most of our major competitors, has allowed us to maintain a strong market presence with auto dealers even as we decreased our origination volumes by two-thirds from last year," he continued.
In fact, due to the lessened consumer demand for vehicles, Berce said the company currently expects annualized origination volume to come in at less than a $3-billion run rate.
In other adjustments, Berce reported, "We have also been evaluating the profitability and capital intensity of all our lending products and channels. As a result of this process, we have discontinued originations in Canada and ceased leasing and direct lending activities. We have also suspended production on our prime platform and significantly pulled back near-prime originations to focus on our traditional subprime core.
"Our decision to limit prime and near-prime credit offerings was based on our inability to generate adequate profitability from these products given the higher funding costs and capital requirements of the current environment. With our constrained volume objectives, we are focusing on originating those loans that provide the highest possible returns," he told investors.
On a more positive note, Berce indicated that despite the falling auction values of large SUVs and pickups, the company's recovery rate on repossessed collateral has remained stable from quarter-to-quarter at 43.6 percent, compared with 43.9 in the previous period.
"Despite significant year-over-year decline in the value of large SUVs and pickup trucks, we have experienced relatively stable recovery rates for the last several quarters due to a greater concentration of compact and more fuel-efficient vehicles in our portfolio, which have actually increased in value year-over-year," he pointed out.
"Also, we have not seen anything in our portfolio metrics to suggest that frequency of default is correlated with vehicle-fuel efficiency," he added. "We expect recovery rates to remain in the low 40-percent range, subject to the normal seasonal strengths and weaknesses."
As for delinquencies, he stated Wednesday, "For the June quarter, credit results followed normal seasonal trends with a modest improvement in credit losses and increasing delinquencies. Annualized net credit losses were 5.9 percent for the June quarter, compared to 6.6 percent for the March quarter and 3.3 percent a year ago."
Additionally, 30- to 60-day delinquency rates for AmeriCredit came in at 6 percent in June, compared with 5.3 percent in the March quarter and 4.7 percent a year ago.
Accounts greater than 60 days delinquent were up slightly to 2.9 percent, compared with 2.3 percent in the prior quarter and 2.1 percent in the same time frame of the last fiscal year.
"Although difficult to measure, we believe we experienced some benefit to payment rates due to the stimulus funds distributed to consumers during the June quarter," Berce highlighted. "Looking at future credit performance, we expect the macro-economy will stay weak as higher unemployment and rising gas prices strain household budgets and apply additional pressure on portfolio credit performance as we go into the normally weaker credit season in the second half of the calendar year.
"We now expect net losses to fluctuate in the mid 6 percent to upper 7 percent range, which is slightly worse than our expectations as of the end of our March quarter," he remarked. "As a reminder, our credit metrics going forward will reflect upward pressure due to the denominator effect of a declining portfolio balance. This will likely impact our net credit loss rate in fiscal 2009 by more than 100 basis points, when compared to a portfolio size that's stable."
According to Berce, a significant portion of the company's loan volume reductions are due to implementing tighter credit guidelines with higher loan pricing.
"Since January 2008, the average custom score of the subprime loans we've originated has increased over 10 points and loan-to-wholesale value decreased over 10 percentage points to approximately 110 percent," he explained.
"At the same time, we have been able to raise the rate and net fees we charge on those loans. While still early, the tighter credit guidelines we implemented have resulted in significant improvement in credit performance in the 2008 origination vintage, compared to the 2006 and 2007 vintages. We will continue to evaluate credit on a regional basis, balancing credit standards and market performance, and increase pricing in markets where competitive dynamics support them," he added.
To continue strong support of AmeriCredit's portfolio, the company indicated that staffing reductions were not made in its collections infrastructure.
"We now operate 24 loan origination offices in major markets fully staffed to service our dealer customers all hours they are open to sell cars. Our sales organization still provides national coverage in support of our loan origination offices," Berce said.
However, the company did close or consolidate 21 origination offices during the quarter. Related reductions were also implemented in overhead and support areas.
"In aligning our organizational structure to our revised originations and portfolio targets, we have been careful to preserve the core strength of our business model and protect future value of our franchise," Berce stressed.
He then handed the call over to Chris Choate, AmeriCredit's chief financial officer, who discussed another key area of the company's business — funding.
In May, AmeriCredit announced a $750 million asset-backed securitization under its automobile receivables trust, which mostly covers subprime auto loans.
Deutsche Bank Securities and Credit Suisse are the lead managers on the transaction, while Barclays Capital, Lehman Brothers and Wachovia Securities are the co-managers.
Referring to this, Choate said, "The ABS markets showed notable improvement leading up to our execution of this deal and we were in a position to take advantage of market conditions. Furthermore, we were able to clear all the bonds in the market and did not have to utilize our forward purchase commitment with Deutsche Bank.
"Needless to say, the capital markets have taken a step back since May. Shortly after our successful May securitization, we began to focus our efforts on using senior subordinated structures for future securitizations as concerns around FSA's financial condition began to surface. Early today (Wednesday), FSA announced that it will no longer issue asset-back securities. This announcement was not a surprise to us. FSA-insured dealers had not only become less attractive to investors, they were also ineligible under our Deutsche Bank agreement based on FSA's credit default swap levels and the negative watch on their credit rating," he explained.
While he indicated that the company has historically favored issuing bond-insured asset-backed securities, Choate said the company has issued more than $4 billion of senior subordinated securities under its AMCAR and APART securitization platforms.
"Credit enhancement requirements in a senior subordinated structure will be somewhat higher than in the wrapped transaction we executed in May," he continued.
Furthermore, Choate said, "We are currently assessing market appetite for the subordinated notes, and may consider securing a forward purchase commitment to provide certainty of funding for these classes over several transactions. Overall, we expect all-in pricing in a senior subordinated dealer to be higher compared to our last wrapped transaction due to the higher pricing on the subordinated notes. However, creating capacity on our warehouse lines to support future originations is a top priority for us at this time."
He explained that the company is in talks with its lenders to renew its prime/near-prime warehouse facility at a bit less than half of its current size, or $400 to $500 million.
"Since we have pulled back significantly on our prime and near-prime originations and are focusing on subprime originations, we will be relying on our $3.25 billion of subprime warehouse lines to support loan volumes," Choate told investors.
"As of July 31, we had available capacity to fund $1.4 billion of subprime originations," he reported. "This is enough capacity at our current run rate to fund originations through fiscal-year 2009, provided we have modest access to the securitization markets. We are optimistic we can execute a senior-subordinated securitization in the September quarter and access markets opportunistically throughout fiscal 2009."
Finally, Choate turned the call back over to Berce for closing remarks.
"The primary issues facing our business are portfolio performance in a challenging economic environment, maintaining liquidity and warehouse borrowing capacity, and accessing the capital markets for securitization transactions. We have taken proactive steps to position the business to withstand weak economic conditions, such as raising cutoff scores, lowering loan-to-value ratios and selectively increasing rates and fees," Berce said.
"We have also been aggressive in protecting liquidity by lowering origination levels by two-thirds, exiting loan products and markets that were not core to our long-term franchise and reducing expenses," he continued, saying this are things the company can control in the current atmosphere.
Overview of Financial Results
AmeriCredit reported a net loss of $150 million, or $1.30 per share, for its fiscal-fourth quarter. It reported net income of $87 million, or $0.66 per share, for the same period a year earlier.
For the fiscal-year, the company posted a net loss of $69 million, or $0.60 per share, compared with net income of $360 million, or $2.73 per share, for the fiscal year ended June 30, 2007.
Net loss for the quarter included a $135 million after-tax impairment charge ($213 million pre-tax), or $1.17 per share, related to the write-off of goodwill recorded in connection with the acquisitions of Long Beach Acceptance Corp. and Bay View Acceptance Corp., and a $7 million after-tax restructuring charge