GM Unit to Sell Car Loans to BofA

The finance arm of General Motors Corp. said Tuesday that it would sell as much as $55 billion in car loans to Bank of America Corp. over the next five years as part of a deal to secure future financing.

GM’s shares jumped on the news, even as some analysts cautioned that it could erode future profit at General Motors Acceptance Corp.

Profit at GMAC has been key in limiting the effect of this year’s financial turmoil at GM as it struggles to stem losses in its North American automotive business.

GMAC has seen its borrowing costs increase sharply after its debt was downgraded to high-yield, or “junk,” status along with GM’s earlier this year.

GMAC Chief Financial Officer Sanjiv Khattri said the so-called whole loan sale deal was a “landmark agreement” to help provide the company access to ample liquidity.

“It allows GMAC to fulfill its strategic mission to finance more GM vehicles without undue strain on the balance sheet,” he said.

Goldman Sachs analyst Robert Barry, however, said the deal highlighted GM’s and GMAC’s weak fundamentals and deteriorating credit outlook. He also said it signaled a change in GMAC’s business model that meant it would be doing less-profitable automotive financing in the future.

“We admit the scale and the tenor of the BofA agreement is unique and we acknowledge it bolsters GM’s and GMAC’s near-term liquidity,” Barry said in a note to clients.

“But we feel that for equity investors, the profit erosion that will result from this ... model outweighs other positives.”

In a joint statement, GMAC and Bank of America said an initial purchase of $5 billion of GMAC’s retail automotive finance contracts had been agreed upon by the two parties.

In each of the agreement’s five fiscal years, Bank of America will buy as much as $10 billion of the contracts, the statement said.

The agreement takes effect this month and ends in June 2010.

GMAC spokeswoman Joanne Krell said she was unable to comment on the size of the company’s total auto loan portfolio. But she said GMAC originated about $20 billion to $25 billion a year in retail auto loans in the United States and acknowledged that the $55 billion represented a sizable chunk of its business.

She also said it was “not really a foregone conclusion” that GMAC’s profit would be hurt by the sale, since GMAC would retain servicing fees for the loans and planned to move the fresh funding into higher-margin business.

“We bought ourselves a ton of liquidity,” Krell said.

“With fewer assets on the balance sheet, that’s fewer assets that we have to fund,” she added.

GM shares gained $1.09, or 3%, to $36.96.