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The Auto Industry: Financing a bubble like you've never seen before...

On January 14th, 2015 I penned Toil, Trouble, Crash and Bubble! Monetizing The Biggest Crash of the Millenium? with the following graphic...

Just keep that in mind as you read my thoughts on GM's amazing blowout quarter that the mainstream media is simply gushing over. This was on the front page of CNBC's website this morning...

Excluding special items...

I noticed that when management categorizes something as "special" or "one-time", sell side analysts literally tend to gloss over it. Literally, no matter how special, or not so "one-time" it may be. In this particular situation we are referring to GM's record recall. Take a look at this...

  1. The company continued to recall more of its cars over the next several months. As of June 30, 2014, GM has issued 45 recalls in 2014, which have involved nearly 28 million cars worldwide and over 24.6 million in the United States.
  2. 2014 General Motors recall - Wikipedia, the free encyclopedia

    en.wikipedia.org/wiki/2014_General_Motors_recall

GM's 28 or so million potentially affected vehicles in 2014 are equivalent to over 40% of GM's fleet and about 11% of all vehicles in operation, using Experian Automotive data.This is more than they sold over the last TWO (2) years. Of course, we can just gloss over that since GM's accounting firm apparently hired a highly skilled storyteller to do this quarter's numbers.

Here are some more choice tidbits from the article:

  1. North American profit margins for the full year were 6.5 percent. Excluding the additional costs for a record vehicle recall in 2014, the margin would have been 8.9 percent...
  2. Shares of GM moved higher in premarket trading following the report.
  3. The company also said it plans to raise its dividend by 20 percent
  4. ... the planned increase, which will boost the company's annual outlay for dividends by about $400 million to $2.4 billion, was due to the strong 2014 results and stronger performance expected this year.

  5. ... plans to pay 48,400 full-time UAW union workers annual bonus of up to $9,000.

It's a Party Over Here - OR - NIRP's Financing a Bubble Like You've Never Seen Before...

It is my contention that GM is not good at managing financial companies through Boom/Bust cycles. Their former captive finance company, GMAC, had to be bailed out and purchased by the government in 2008. Did we learn our lesson? I'll let the numbers tell the story, but first a few qualitative observations, such as desperate car selling measures like we never seen before.

  1. Zero down sub prime lending...
  2. 100 dollar a month leasing...
  3. Auto repos are at all time highs (or at least 70% higher)

From Wikipedia, on GM's former captive finance company, GMAC:

The bank has more than 15 million customers worldwide and provides a range of financial services including auto financing, corporate financing, insurance, mortgage services, and online banking. In 2009, Ally employed 18,900 people. In 2008, the firm provided financing to 75% of the 6,450 General Motors dealers.

The company was bailed out by the US Government during the financial crisis of 2007–08 taking over from its previous owner General Motors

Not to be outdone, GM goes at it again with GM Financial:

General Motors Financial Company, Inc. is a financial services arm of General Motors. The company is a global provider of auto finance, with operations in the United StatesCanadaEuropeand Latin America. The company is headquartered in Fort WorthTexas.

Founded in 1992 as AmeriCredit Corp., the company was acquired by GM in October 2010 and renamed General Motors Financial Company, Inc. The company provides retail loan and lease programs through auto dealers for customers across the credit spectrum. They also offer commercial lending products, such as retail floorplan, construction and real estate loans, or insurance for cardealerships.

Before its acquisition by GM, the company ranked at 768 on the Fortune 1000.[2] AmeriCredit's loan parameters would originally provide financing at an interest rate of between 10% and 23% APR to clients with credit scores around 500 who can prove employment and residency, though the company has become increasingly more stringent over the past few years.

Acquisition by General Motors

In July 2010, General Motors entered into a definitive agreement to acquire AmeriCredit in an all-cash transaction valued at approximately $3.5 billion. The deal provided GM with a new financial arm to replace the loss of GMAC in 2006.[3] Following the approval of the deal by AmeriCredit shareholders, GM renamed the company "GM Financial" on October 1, 2010.[4]

On Sep. 4, 2014, GM and GM Financial announced they entered into a support agreement providing for leverage limits and liquidity support to GM Financial if needed, as well as other general terms of support. Under the terms of the agreement, as GM Financial expands its product portfolio and grows its business, GM committed to provide funding to GM Financial if its earning assets leverage ratio rises above pre-determined thresholds. GM extended an intercompany revolving credit facility to GM Financial to provide up to $1 billion of liquidity if needed. This facility, which is subordinate to GM Financial’s senior unsecured and secured debt, will replace an existing $600 million line of credit from GM. The agreement also provides that GM will use its commercially reasonable efforts to ensure that GM Financial will continue to be designated as a subsidiary borrower on up to $4 billion of GM’s corporate revolving line of credit.[5]

Since being acquired by GM in 2010, GM Financial has significantly increased its share of GM’s business which now represents 75 percent of GM Financial’s consumer loan and lease originations.[5]

On Sep. 25, 2014, Standard & Poor's Ratings Services upgraded the credit ratings of both GM and GM Financial to investment grade with a stable outlook. The new GM corporate and GM Financial credit rating is BBB-.[6]

 I'm not going to go into an automotive finance class here, but if (or as) things deteriorate, pay attention to the terms floorplan (dealers get throats slit in a slow down), lease programs (depreciating collateral backing increasingly defaulting loans with a weak resale market), and the oldie but goodie "across the credit spectrum", ie. as in skilled storyteller turned bean counter parlance - includes people who knowingly won't pay the loans back.

Just in case nobody decided to actually glimpse at the numbers behind GM's blowout numbers, let me do it for you...

So, let me get this straight. GM Financial has triple digit increases in interest expense in a NIRP (negative interest rate policy) environment. As a matter of fact, 16% of government bonds now have a negative yield, but this company is spiking in the opposite direction as the rating agencies RAISE their rating on it???!!! Yeah, okay! Delinquincies are high, and getting higher. All of this, and the news media is gushing about the parent company selling more cars!!?? Are they selling cars or are they giving them away as a packaged deal with loose money loans? I want you guys to sit back and think about it.

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