September 29, 2020

Captive’s strength helping GM get through pandemic

The strength of GM Financial has been a bright spot for General Motors during the coronavirus crisis. GM’s captive has enough liquidity to stand largely on its own, the ability to defer existing customers’ loan payments and the power to attract new buyers with generous financing incentives.

At the end of the first quarter, GM Financial had $24.9 billion in liquidity, which would cover at least six months of net cash needs without tapping capital markets or GM, CEO Dan Berce said. Under its support agreement with GM, the lender has a $2 billion cushion before it would need any additional capital from the automaker.

GM expects 2020 credit losses to range from 2 to 2.5 percent and for used-car values to decline 7 to 10 percent industrywide.

“We could experience double that credit loss expectation and double that decline in used-car values, and it wouldn’t eat up the whole $2 billion capital cushion. And GM wouldn’t have to pay capital,” Berce said.

In March, the captive paid GM a $400 million dividend. It plans to pay another $400 million later this year.

In the first quarter, the captive’s net income fell 38 percent, to $167 million, while revenue dipped only 1.6 percent, to $3.6 billion. Loan originations fell 9.3 percent, to $6.5 billion, and lease originations dropped 3.3 percent, to $5 billion.

GM Financial’s payment-deferral offer is keeping customers afloat for now, but the captive expects higher delinquencies this summer as the two-month deferral window closes.

About 3.5 percent of GM Financial’s customers deferred their loan payments in April after the pandemic hit. Typically, 1 to 2 percent of customers take deferrals. That means they can bypass payments for two months, paying them at the end of the loan instead. The captive’s 30-day delinquency rate was 2.7 percent in the first quarter, compared with 2.5 percent a year earlier. From January to March, the majority of customers who took a loan deferral fell into the subprime credit tier, but in April, 56 percent of customers who deferred their payment had prime credit scores.

“Our portfolio is heavily prime. Historically the subprime consumer had less resources to make payments if they lost their job or had a life event,” Berce told Automotive News. “In this case, unemployment is affecting everyone swiftly. The fact that a prime customer can defer their payment for two months and get their financial affairs in order is a big benefit.”

Stable delinquency rates show the deferral program has been effective overall, Berce said.

“Between customers using their stimulus money and the relief we’ve given, we’ve been able to keep our metrics stable,” he said. “As we go throughout the year, stimulus money is going to wane. And when we make a payment deferral we typically do it for two months, so as we go through the summer, we expect to see delinquencies higher and losses higher.”

In March, GM Financial began offering well-qualified buyers 0 percent financing for 84 months with the first payment due in 120 days. Berce said the offer is available on most new vehicles, and it was especially effective for selling pickups.

The captive’s standard rates, which are as low as 2.99 percent and available to a wider variety of buyers, also were effective, he said. Many of the standard-rate payments also offered 120-day payment deferrals.

GM also let dealers defer floorplan interest payments. About half of the captive’s 1,290 floorplan dealers did so, typically for 90 days. And more than 90 percent of GM dealers received a federal Paycheck Protection Program loan, Berce added.

“That’s a big factor in dealer financial health as we go through this crisis,” Berce said.

Editor’s note: An earlier version of this story misstated GM Financial’s 30-day delinquency rate in the first quarters of 2020 and 2019.