GMAC's Other Headache

The one bright spot for GMAC used to be its auto-loan business. Now, that, too, is dimming.

Declining values of gasoline-guzzling pickup trucks and sport utility vehicles are looming over the lender, adding to its existing problems with souring mortgages through its ailing home-loan unit. This leaves GMAC in worse shape than rival Ford Motor Credit.

And it is unlikely GMAC can look to General Motors Corp. for help. The auto maker, struggling to cope with a steep decline in sales of pickups and SUVs, announced production cuts Monday. The company has a 49% stake in GMAC after a consortium led by private-equity group Cerberus Capital Management LP, parent of Chrysler LLC, bought 51% of GMAC in 2006 for about $14 billion.

GMAC, set up in 1919 to provide financing to buyers of GM vehicles, made $50.8 billion in loans for new and used vehicles last year. The lender, which once propped up GM with steady profit during economic downturns, has been weakened by the billions of dollars it pumped into its struggling mortgage subsidiary, Residential Capital LLC. GMAC posted a net loss of $589 million in the first quarter, compared with a loss of $305 million a year earlier.

In addition, falling demand for pickup trucks and SUVs, which make up a sizable chunk of GM's production mix, amid $4-a-gallon gasoline, should further hurt GMAC. The value of gas guzzlers has dropped sharply in the used-car market. GMAC is saddled with inventories of thousands of these vehicles as they come off leases or are repossessed from owners unable to keep up with payments.

Typically, GMAC takes back vehicles at the end of leases and sells them to dealers at discounted prices based on estimated values. On average, auction prices on trucks and SUVs fell by more than 20% in May compared with year-earlier prices, according to data from Manheim, a wholesale auction company for used cars.

"GMAC is monitoring the market conditions closely," a GMAC spokeswoman says.

A representative of Cerberus said GMAC's management is "working hard to strengthen the balance sheet and emerge from this unprecedented economic environment better positioned for the future."

GMAC also faces rising delinquencies in loan payments and increasing numbers of repossessions as owners of pickups and SUVs owe more on the vehicles than they are worth.

Another worry is GMAC's high level of borrowings compared with its equity cushion. One measure of GMAC's leverage ratio, as calculated by Moody's Investors Service, shows that the company has 23 times its net worth in borrowings. Ford Credit has 11 times its net worth.

GMAC's leverage "is an aggressive measure and has negatively impacted GMAC's credit standing," says Mark Wasden, a debt analyst at Moody's.

GMAC has a hefty cash balance of $14.84 billion on hand, but steeper-than-expected declines in residual values mean GMAC won't ride to GM's rescue during this downturn.

By: Aparaijita Saha-Buena
Wall Street Journal; June 26, 2008