In a 45-page report on General Motors and General Motors Acceptance Corp., a team of Merrill Lynch analysts from the unsecured debt and ABS groups highlighted the benefits and drawbacks of GMAC's increased reliance on securitization as its corporate rating heads south. GMAC has already started to change its funding strategy to rely more on secured financing and is likely to be forced to turn to the securitization markets even more if its corporate debt falls below investment-grade status.
Merrill expects to see both GM and GMAC downgraded below investment grade by either Standard & Poor's or Fitch Ratings - and possibly even both - in the next three to six months, noting that its corporate bonds are already trading wide of single-B levels, making further unsecured debt issuance by GMAC prohibitively expensive.
"We believe the erosion of GM's fundamentals reflects an ongoing trend, and our sensitivity analysis indicates that downside scenarios are very negative," reported analysts.
This increased emphasis on securitization has two main benefits. First, by using securitization, GMAC can continue to profitably make sales stimulating auto loans. Second, loan sales, whether into the ABS or whole-loan markets, generate "gain-on-sale" revenues allowing GMAC to augment non-interest servicing f ees. In addition to the auto loan portfolios sold to Bear Stearns in recent years, mortgage lending unit GMAC-RFC retains the servicing rights on the $45 billion of ABS it issued last year, noted Merrill analysts.
However, the analysts point out that there are some concerns inherent in such an increased dependence on securitization as well. "A more aggressive use of secured funding for its finance operations provides near-term support, but it is no panacea," analysts pen.
The gain-on-sale revenues, for one, can be tied closely to the cyclical nature of the manufacturing business and make the GM earnings inconsistent. Also, equity investors and rating agencies tend to view those revenues as lower quality, potentially dampening GMAC's valuation and debt ratings. Finally, such revenues can present problems because funding dependence on a single market can increase dislocation risks for an issuer.
Researcher Theresa O'Neill said she estimates GMAC's origination volume to be in the range of $35 billion to $45 billion per year over the next five years. O'Neill also said she expects the company will turn to secured funding and asset sales for all of that volume, meaning it will use some combination of term ABS, whole loan sales and ABCP. According to the report, Merrill estimates that GMAC could issue $30 billion of secured funding without new issue spreads being materially affected.
The reason GMAC can issue so much is in part because a significant portion of the company's existing term ABS will mature at the end of the year, allowing investors to reinvest in order to maintain their weights to the auto ABS sector and to GMAC auto ABS. Also, the quality of the underlying collateral on GMAC's term deals since the 2000-2 transaction have seen cumulative losses of less than 55 basis points, which is relatively strong, and enhancement may increase as GMAC securitizes larger pools.
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