General Motors Acceptance Corp. may be issuing a lot less ABS than expected this year, and possibly for the next five, as Bank of America Corp. last week agreed to buy $55 billion worth of retail auto loans from GMAC over the next five years. Not only will the deal reduce the amount of loans GMAC has available to securitize, but sources also believe BofA is not likely to securitize any of those loans via its new Bank of America Securities Auto Trust.
Under the agreement, BofA will make an initial purchase of $5 billion in GMAC loans, and then to buy as much as $10 billion of loans from GMAC through June 2010. The $10 billion per year represents approximately 30% of GMAC's U.S. retail loan originations. The deal is seen as a boon to GMAC as the company now has a guaranteed market for its retail auto loans, enabling it to continue offering loans at competitive rates.
The deal will definitely reduce the amount of term ABS issued by GMAC, but is extremely unlikely to quash the company's ABS issuance altogether. "We believe the agreement will reduce but not eliminate the amount of loans that GMAC needs to fund in the asset-backed markets," wrote Merrill Lynch analyst Teresa O'Neill.
"This {deal} does not mean that GMAC will be absent from the ABS market," wrote analysts with Lehman Brothers. Using baseline projections for auto sales and retail loan prepayments, Lehman estimates that GMAC will need to acquire or roll approximately $15 billion of borrowings through the end of 2006, and expects $8 to $10 billion of that to be funded through the ABS market.
With its extensive base of commercial banking deposits, BofA is not expected to securitize any of the loans. "They probably will not look to securitize those. They have a variety of different funding sources," speculated Jeff Salmon, a director of ABS research with Barclays Capital.
"We do not expect [BofA] to fund the purchases in the asset-backed markets," wrote O'Neill. She went on to point out that BofA's management previously indicated the bank wanted to invest excess deposits in consumer loans.
Salmon said the deal raises the question of what other banks are planning to make similar moves and when, highlighting Citigroup Global Markets, JPMorgan Securities and Wachovia Securities as banks with enough commercial and investment banking clout to pull similar deals.
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