GMAC to Trim Down U.S. Leases after $716 Mil Pre-Tax Impairment on Off-Leases
NEW YORK — GMAC Financial Services reported a 2008 second quarter net loss of $2.5 billion, compared with net income of $293 million last year. This downswing was largely due to industry-wide declining residual values on its off-lease portfolios in North America.
More specifically, the results in the quarter were impacted by a $716 million impairment of vehicle operating lease assets in the auto finance business as a result of declining vehicle sales and lower used-vehicle prices for certain segments, as well as significant losses at Residential Capital related to asset sales, valuation adjustments and loan loss provisions. These items were partially offset by profitable results in the insurance and international auto finance businesses, company officials noted.
"A soft economic environment and continued volatility in the mortgage and credit markets have significantly affected results for the second quarter," explained GMAC chief executive officer Alvaro G. de Molina. "While conditions such as higher fuel prices and weaker consumer credit prove to be headwinds, we continue to aggressively manage through this economic disruption to position GMAC for longer-term success.
"Despite the current obstacles, we are encouraged by some key wins such as successfully completing our global refinancing and bond exchange, preserving long-term ownership of GMAC Bank and de-risking the balance sheet at ResCap," he continued. "There is still more to do, and the management team is committed to taking the steps needed to ensure a solid foundation for the company, including continued realignment and streamlining of the mortgage business and better optimization of the risk and reward model in auto financing."
GMAC's consolidated cash and cash equivalents were $14.3 billion as of June 30, down slightly from the cash balance of $14.8 billion at March 31, 2008. Of these total balances, ResCap's cash and cash equivalents balance was $6.6 billion at quarter-end, up from $4.2 billion at March 31, 2008. The change in consolidated cash is related to repayment of GMAC and ResCap debt maturities, offset by new secured funding, lower asset levels and growth in deposits at GMAC Bank, the company indicated.
GMAC's global automotive finance business reported a net loss of $717 million in the second quarter of 2008, compared with net income of $395 million in the year-ago period.
Weaker performance was primarily driven by a $716 million pre-tax impairment on operating leases in the North American operation, which more than offset profits in the international business, according to officials.
In measuring the accounting impairment, the company was able to consider expected cash flows from various arrangements with General Motors, including about $750 million related to the risk-sharing arrangement; about $800 million related to the residual support program; and about $350 million of residual-related settlement payments.
Additional factors affecting results were an increase in the provision for credit losses due to loss severity and lower gains on sales, the financial arm said.
The North American lease portfolio included approximately $30 billion in assets as of June 30, with approximately $12 billion in SUV leases, $6 billion in truck leases and $12 billion in car leases.
The impairment of operating leases resulted from the sharp decline in demand and used-vehicle sale prices for SUVs and trucks in the U.S. and Canada, which has affected GMAC's remarketing proceeds for these vehicles, the report stated.
As a result of these market trends, GMAC said it is taking steps to reduce the volume of new-lease originations in the U.S. The company will also discontinue the SmartBuy balloon contract program, suspend all incentivized lease programs in Canada and increase pricing and returns on other lending activities.
GMAC's lease portfolio outside of North America has not experienced the same decrease in market value, executives highlighted.
New-vehicle financing originations for the second quarter of 2008 decreased to $12.4 billion of retail and lease contracts from $14 billion in the second quarter of 2007, due to lower industry sales levels in North America.
Credit losses have increased in the second quarter of 2008 to 1.40 percent of managed retail assets, versus 0.92 percent in the second quarter of 2007. The company said that the sharp increase is related to the current trends in used-vehicle prices, which drove higher loss severity.
While losses trended up, delinquencies decreased in the second quarter of 2008 to 2.30 percent of managed retail assets, versus 2.46 percent in the prior year period. The decrease reflects the recent measures taken to tighten underwriting criteria and increased customer servicing activities as the U.S. economy remains weak, officials pointed out.
Liquidity and Capital
In June, GMAC and ResCap announced a comprehensive series of transactions, which included extending key bank facilities, increasing the amount of available funding and further enhancing liquidity positions. The transactions included:
—GMAC obtaining a new, globally syndicated $11.4 billion secured revolving credit facility with a multi-year maturity that steps down to $7.9 billion after two years, and renewing the one-year, syndicated commercial paper back-up facility, New Center Asset Trust, in the amount of $10 billion.
—ResCap extending for one year the maturity on substantially all of its bilateral bank facilities totaling approximately $11.6 billion and obtaining a new $2.5 billion syndicated whole-loan repurchase facility.
—ResCap executing private exchange and cash tender offers for U.S. dollar equivalent of $14 billion in aggregate principal amount of its outstanding debt, thereby reducing debt outstanding by $2.9 billion in principal and extending maturities.
—GMAC providing a $3.5 billion two-year senior secured credit facility to ResCap, which includes $750 million of first loss protection from GM and Cerberus ResCap Financing, an affiliate of FIM Holdings LLC.
—Significantly reducing ResCap's tangible net worth covenants related to its credit facilities from the previous level of $5.4 billion to $250 million (excluding GMAC Bank) with consolidated liquidity of $750 million.
During the second quarter, GMAC and certain affiliates of Cerberus disclosed approximately $2.4 billion of intended actions to support ResCap's near term liquidity.
In addition, GMAC contributed to ResCap approximately $250 million (principal amount) of ResCap debt, which was subsequently retired. In exchange for the capital contribution, GMAC received additional shares of ResCap preferred equity equal to the market value of the debt as of March 31, 2008. As of June 30, ResCap's total equity base was $4.1 billion.
The FDIC granted a 10-year extension of GMAC Bank's current ownership on July 21, 2008. This action enables GMAC to strengthen the bank over the long-term, which is an important source of funding for mortgage and auto financing activities.
GMAC's insurance business recorded net income of $135 million, up slightly from net income of $131 million in the second quarter of 2007. Results primarily reflect a non-recurring tax benefit, which offset higher weather- related losses, officials noted.
The insurance investment portfolio was $7.1 billion at June 30, compared with $7.4 billion at June 30 last year. The decrease in the portfolio is due primarily to the repayment of inter-company loans related to the funding of the Provident Insurance acquisition. The majority of the investment portfolio is in fixed income securities with less than 10 percent invested in equity securities, the company explained.
In July, GMAC's plan to dividend 100 percent of the voting interest in the insurance business to GMAC's shareholders was completed. GMAC continues to hold 100 percent of the economic interest in GMAC Insurance. This action was taken in the interest of maintaining the current financial strength rating and, therefore, preserving the value of the operation.
Real Estate Finance
ResCap reported a net loss of $1.9 billion for the second quarter of 2008, compared with a net loss of $254 million in the year-ago period. Results are primarily attributable to significant losses from asset sales as ResCap reduced the size and risk of its balance sheet and higher loan loss provisions due to continued deterioration in certain European markets, according to the company.
Partially offsetting losses was a $647 million gain recognized from ResCap's tender offer and the retirement of debt, GMAC noted.
ResCap continues to implement an aggressive realignment of its business amid a vastly changing mortgage market, despite the negative impact to short-term earnings. Recent actions include significantly reducing the size and risk of its balance sheet, originating only mortgages with market liquidity, winding down the business lending portfolio, leveraging the world-class servicing platform and continuing to rationalize the cost base, executives remarked.
ResCap's U.S. residential finance business is beginning to stabilize as the company reduces balance sheet risk and continues to realign operations. While prime conforming loan production decreased modestly year-over-year with $12.2 billion in the second quarter of 2008 versus $12.7 billion in the year- ago period, production of higher-margin government loans increased to $3.8 billion this quarter, compared to $800 million in the second quarter of 2007. In addition, operating expense targets were achieved, the company reported.
The international mortgage business experienced a decline in net income in the second quarter related to illiquidity in the global capital markets and the continued weakening of consumer credit in key markets. According to officials, this drove significant realized and unrealized losses on loans held for sale.
As a result of the market environment, ResCap has currently suspended all production outside of the U.S. with the exception of Canadian insured loans. The business lending operations also experienced continued pressure in the second quarter related to the decline in home sales and residential real estate values.
GMAC said it continues to manage through a softer economic environment and a global market disruption with significant actions geared toward achieving longer-term financial health. Recent actions include:
—Stabilizing liquidity by refinancing bank lines, extending debt maturities, and preserving long-term ownership of GMAC Bank.
—Significantly reducing ResCap's balance sheet.
—Taking steps to increase pricing and improve returns for all automotive leasing and lending activities.
—Reducing the volume of new-lease originations in the U.S. and suspending all incentivized lease programs in Canada.
—Executing a plan to preserve the value of the insurance business.
—Leveraging the proven servicing platforms in mortgage and auto finance to mitigate frequency and severity of losses.
Looking ahead, the company said it is focused on executing strategies that restore profitability and longer-term financial health including improving funding costs, evaluating opportunities to shed non-core operations, and taking steps that move GMAC toward an independent, bank-funded lender and servicer.