As its parent's corporate debt rating teeters on the brink of junk status, General Motors Acceptance Corp. will tap the ABS market with a $1.5 billion auto lease offering, marking GMAC's first foray into the auto lease sector. The deal is structured with a novel three-tiered, true-sale process which buffers it from the dual headline risk of GMAC's declining credit quality and the potential of a Pension Benefit Guaranty Corp. asset seizure in the event of a bankruptcy.
One of the deal's most unique factors is its legal structure, which insulates it from risk associated with liability to the PBGC. In a worst-case scenario, the PBGC could attach liens to the lease assets to satisfy GMAC's pension obligations in the event of a bankruptcy. Two years ago, Standard & Poor's caused a stir in the sector by placing 32 classes of auto lease ABS on watch for a downgrade due to this risk.
According to a Fitch Ratings presale report, the deal is structured so that GMAC has a prior lien on the vehicles included in the lease assets. In the three-tiered true-sale of the notes in the deal, GMAC will sell the notes to Capital Auto Receivables Inc., which will then deposit the notes with Capital Auto Receivables Trust. An additional party, called the CARAT indenture trustee, will then file with appropriate state authorities to develop a perfected security interest in the lease assets. The perfected security interest then prevents the PBGC from being able to attach liens to the lease assets. "It's a structure we have never seen before," said Carlen Moday-Bielawski, analyst with Fitch.
The senior notes receive initial credit enhancement of 16.75%, with 12.75% for the single-A rated B class and 9.25% for the triple-B C class. One of the deal's main strengths is the low level of losses experienced by GMAC's SmartLease portfolio, according to Fitch, which came in at 0.59% for year-end 2004. The portfolio experienced a 1.94% delinquency rate, representing a five-year low.
Of course, Fitch notes that GMAC's recently downgraded triple-B minus unsecured credit still faces "intense competition among auto manufacturers in the U.S. market and continued reliance on incentives" causing downward pressure on used car prices and Fitch maintains its negative rating outlook. The deal also has a high geographic concentration of leases in Michigan, which makes up 41.6% of the pool. By contrast, the next highest concentration is Florida with 9.54% pool exposure.
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