The announcement that General Motors Corp. is exploring the sale of a controlling stake in its financing arm, General Motors Acceptance Corp., had ABS market participants speculating about the possible impact a sale would have on its outstanding retail auto loan and wholesale dealer floorplan deals. While the main concern surrounds the dealer floorplan ABS, the market will likely not be able to gauge the true impact of the sale until a potential buyer steps forward. Overall, however, the market reaction was one of relief. "This could be a huge positive for GMAC," said one ABS analyst.
With a possible sale netting in the area of $11 billion to $15 billion, there are few entities for whom the deal would make sense, among them are Bank of America Corp., HSBC Holdings and GE Capital, according to reports. The deal would not only give GM an infusion of capital to assist its ailing operations, but, if bought by an investment-grade entity, could improve GMAC's credit rating and its access to the unsecured debt markets.
The market took the news as a positive, with spreads on GMAC's triple-A dealer floorplan deals tightening one to three basis points and triple-A retail auto spreads tightening three to five basis points, by one account. The tightening was also attributed to news that GM had reached a tentative agreement with the United Auto Workers union reducing health care liability payments by about $15 billion, saving the company $1 billion in cash per year.
Both Fitch Ratings and Moody's Investors Service revised their outlooks on GMAC following the news. Fitch currently rates GMAC's senior unsecured debt at BB' and announced last week that its rating has been placed on "ratings watch evolving." Moody's, which currently has a Ba1' rating on GMAC's senior unsecured debt, also put the company on review as "direction uncertain" after the announcement. Standard & Poor's made no changes to its review levels on GMAC, which it rates BB' with a "watch developing" status.
"If a highly rated financial institution were to take a controlling stake in GMAC, an investment grade rating for GMAC is possible, which would benefit ABS transactions through a stronger servicing entity with greater financial flexibility and potentially improved operational efficiencies," said John Bella, senior director with Fitch.
However, even if the reverse scenario takes place, and GMAC is bought by a financially weak entity, the downside risk is minimal, as most of GMAC's portfolio consists of prime loans, and because the critical mass of the servicing operation makes it less likely that servicing would be transferred. "It is kind of a too big to fail' syndrome," said Kumar Kanthan, managing director with Moody's. Also, servicing prime loans is generally less of a concern, added Kanthan.
The only sector that seems to still carry some concern is the dealer floorplan transactions, which, regardless of who controls GMAC, will be closely linked to the health of GM itself. "A drop in vehicle demand could lead to weaker dealer profitability and consequently negatively impact floorplan performance," said Bella. That would, however, be an issue regardless whether or not GMAC is sold.
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