AmeriCredit Reduces Originations Even Further
FORT WORTH, Texas — AmeriCredit announced Monday that it is further reducing monthly auto loan originations to $100 million and closely monitoring its warehouse covenants in an effort to withstand the difficult operating environment and come through the other side.
"With many of our competitors scaling back or exiting the subprime auto finance space, even at this low origination run rate, we believe we will be able to maintain our national footprint and preserve our franchise value for when conditions improve," explained Dan Berce, president and chief executive officer, Monday.
Announcing the company's first-quarter fiscal 2009 results, Berce indicated that $579 million in new auto loan originations were purchased by AmeriCredit during the period, down from $780 million in the previous quarter.
"The decline in originations' volume is driven internally by our focus on preserving liquidity in light of the current capital markets environment and externally by a reduction in new- and used-car demand," he reported.
"Earlier this year, in an effort to reduce origination volume, we significantly tightened credit guidelines and lifted the minimum required credit scores," he continued. "While still early, key performance metrics, such as delinquency rates on the 2008 vintage originations are encouraging.
"During the September quarter, we were able to take advantage of the rapidly changing competitive environment to raise rates and the net fees we charge on loans while remaining selective on the quality of loan applicants we approved," Berce said.
Meanwhile, Chris Choate, chief financial officer, indicated that the "capital markets continue to be highly volatile and challenging for us to access."
Even so, Choate said the company was able to execute its $500 million 2008-1 AMCAR securitization in early October.
"At this point, our Wachovia funding facility is fully utilized and cannot be drawn against in the future," he noted. "While both the funding cost and our required capital investment in the 2008-1 transaction have increased dramatically and we have at best a breakeven profitability on the loans securitized, this transaction was critical to providing permanent financing for approximately $650 million of finance receivables."
Continuing on, Choate explained, "We are currently evaluating investor interest for another securitization prior to this calendar year end. While we anticipate the market appetite for subordinated bonds to remain limited and all-in pricing to be higher than the 2008-1 transaction we just completed, we expect credit enhancement levels to remain relatively stable."
By the end of the quarter, AmeriCredit had $3 billion of warehouse credit facilities to support subprime originations. As of Oct. 23, Choate said the company has available borrowing capacity on these lines to fund $1.5 billion in subprime originations.
"These facilities are not scheduled to mature until October 2009," he highlighted. "We anticipate that the renewal process for these facilities may be challenging and our warehouse capacity may be reduced and the borrowing terms will not be as favorable as currently exist given the economic and capital markets."
He went on to say that AmeriCredit is in compliance with all warehouse covenants as of Sept. 30.
"We are closely monitoring two covenants," he added. "One covenant requires that we maintain a portfolio net loss ratio of less than 8.5 percent of average receivables on a rolling six-month basis. The other is an aging limitation in our $2.25 billion Master Warehouse Facility that requires us to buyback receivables that have been pledged to the line for more than 364 days.
"If we are unable to securitize additional receivables by May 2009, we may not have sufficient liquidity to repurchase these aged receivables from the warehouse facilities. While we do not forecast breaching either of these covenants, if we were to breach them, our lenders could declare an event of default on our warehouse lines and, potentially, remove us as servicer of the portfolio," Choate stressed. "A declaration of an event default in our warehouse lines would result in an automatic event of default in certain securitization transactions as well as our unsecured debt.
Moreover, he said the company is monitoring a covenant with its Deutsche Bank forward purchase commitment which requires AmeriCredit to maintain a portfolio net loss ratio of less than 8 percent of average receivables on a rolling six-month basis.
"If we were to breach this covenant, we would be unable to utilize the remaining capacity in our Deutsche commitment," Choate reported.
AmeriCredit announced a net loss of $1.7 million, or $0.01 per share, for its fiscal first quarter ended Sept. 30, 2008. This compares to the company reporting a net income of $61.8 million, or $0.49 per share, for the same period a year earlier.
The allowance for loan losses as a percentage of finance receivables increased to 6.8 percent from 6.3 percent at June 30, 2008.
Originations were $579.3 million for the quarter ended September 30, 2008, compared with $2.4 billion for the same quarter last fiscal year.
Additionally, finance receivables totaled $14.1 billion, compared with $16.4 billion last fiscal year.
Annualized net charge-offs totaled 7.3 percent of average finance receivables for the quarter, compared with 5.4 percent for the prior period in 2007.
Finance receivables 31-to-60 days delinquent were 7.4 percent of the portfolio, compared with 5.5 percent in 2007.
Moreover, accounts more than 60 days delinquent were 3.6 percent of the portfolio, compared with 2.6 percent a year ago.
Unrestricted cash was $243.8 million, excluding $112.3 million of investment in The Reserve Primary Money Market Fund, which has been reclassified to investment in money market fund due to the fund's temporary suspension of distributions.
The company has additional liquidity of about $150 million from borrowing capacity on unpledged eligible receivables, officials indicated.
During the September 2008 quarter, AmeriCredit retired $114.7 million of its 1.75 percent convertible notes. Book value was $16.49 per share at September 30, 2008, executives reported.
Offering a bit of insight, Berce said Monday, "Increases in credit losses, delinquencies and deferments during the September quarter reflected typical seasonal deterioration exacerbated by the protracted slowdown in the economy.
"Credit results were also affected by our plans to carry an elevated level of delinquencies and maximize our use of deferments to provide our customers the financial flexibility to navigate through the next few challenging months into a seasonably better part of the year. We anticipate that these actions will minimize the ultimate losses in our portfolio," he continued.
AmeriCredit's recovery rate on repossessed assets came in at 41 percent for the period, compared with 43.6 percent in the previous quarter. Berce said the management team expects the recovery rate to continue in the low 40-percent range going forward.
"As we head into what typically is our weakest quarter for credit performance, we expect to experience higher credit losses as an increasingly deteriorating macroeconomic environment continues to pressure our customer base," he explained. "As a reminder, our credit metrics have and will continue to reflect material upward pressure due to the denominator effect of a declining portfolio balance.
According to Choate, the company's subprime warehouse lines may require about $100 million in additional credit enhancement by calendar year-end.
Also, he said, "Our forecast indicates that we remain close to performance trigger levels on three of our securitization trusts for several more months and we may continue to trap cash to build higher credit enhancement levels. One of these trusts, the 2007-D-F securitization breached its default trigger during the September quarter."
Wrapping up the conference call, Berce explained, "Consumer confidence is at all-time lows, unemployment is steadily increasing and the capital markets have remained stubbornly restricted. Operating in this environment over the past year, we have seen and expect to continue to see pressure on our portfolio credit performance and our liquidity position.
Furthermore, he indicated, "And we have rationalized, and will continue to rationalize, our infrastructure and operating expenses to our reduced originations target. On the credit front, we are diligently managing our portfolio performance by increasing staffing and hours worked and optimizing the use of all the collection tools at our disposal.
"While we expect to face challenging economic headwinds throughout 2009, we remain confident that our business model is viable and that it addresses a fundamental need of middle-market consumers," Berce said.
"And, once the economy improves and access to the capital markets opens back up, AmeriCredit is well-positioned to take advantage of a much improved competitive environment. Until that time, we are committed to taking additional steps as necessary to protect and preserve the value of our franchise," he concluded.