General Motors Co. is getting back into subprime lending, a move that will give its dealers more options to lease and finance car sales but one which critics worry could drive the automaker into another financial pileup.
GM said Thursday that it would purchase AmeriCredit Corp. in an all-cash transaction valued at about $3.5 billion, or $24.50 a share.
The acquisition gives GM what’s known as a “captive finance unit” or lending division that allows it more flexibility to offer lease and finance deals. It would fill the role once played by GMAC; the automaker sold all but a minority interest in that company in 2006.
“Adding AmeriCredit to our team will improve our competitiveness in auto financing offerings, and I am very pleased to have them on board,” GM Chief Executive Edward E. Whitacre Jr. said.
But the deal immediately drew fire from critics, who recalled how the Detroit automaker’s former addiction to providing easy credit and cut-rate financing contributed to GM’s financial woes and eventually a federal bailout that cost taxpayers billions of dollars.
“Making questionable loans, with taxpayer money, in order to buttress sales during a recession is not a sustainable business model and is an abuse of the government bailout,” said Peter Schiff, president of Euro Pacific Capital, a Westport, Conn., brokerage firm. “GM should focus on selling cars to consumers who can afford the vehicles.”
GM emerged from bankruptcy reorganization a year ago, using massive federal loans to restructure its business. The government now owns 61% of the automaker and is looking to recoup money it poured into GM.
The proposed purchase of AmeriCredit “raises some red flags,” said John Van Alst, staff attorney of the National Consumer Law Center in Boston.
He said the Fort Worth company followed the model of the subprime lending industry, which charges high interest rates based on the assumption of high default rates rather than carefully underwriting loans to people with poor credit histories to make sure that the borrowing will be paid back.
“Clearly GM recognizes that it can sell to the subprime market, but I want to make sure it is at fair terms,” Van Alst said. Low-income and working-class families “need a deal they can afford, a loan they can pay off and keep the car.”
According to one measure, the pace of subprime auto lending has declined over the last 18 months. The percentage of buyers who obtained loans with interest rates above 10% at dealerships declined to 7% of sales in June from 11% in January 2009, according to Edmunds.com, an auto information company.
GM is already working with AmeriCredit to provide auto loans to customers with “non-prime” or poor credit ratings. But this deal will also allow GM to do more with auto leases, which after almost dying during the recession are starting to make a comeback and could account for as much as a quarter of auto sales this year.
“This is a really good, strong, strategic move for the company,” said Rebecca Lindland, an analyst with IHS Automotive. “Every car they don’t sell because of a lack of financing is money left on the table and negatively impacts the balance sheet.”
GM has a low percentage of leases and subprime loans compared with its competitors, analysts said, in part because it lacks its own finance arm. Building up its leasing capacity should be of particular help to its Cadillac division because a large percentage of luxury car drivers lease their vehicles.
And making subprime loans might not be as risky as it sounds, said Jesse Toprak, an analyst at auto information company TrueCar.com.
He said the risk of default associated with a purchase with a 20% down payment is very low, even for people with less than stellar credit ratings.
“There are a lot of subprime borrowers who are good credit risks, but might have had one isolated incident that hurt their credit score,” Toprak said. “It depends on how they go about finding those customers that will make the difference between real sales growth and going back to lending like a drunken sailor.”
The automaker said it would continue to work with Ally Financial Inc., the former GMAC finance company, for loans to customers with good credit and to provide inventory financing for dealers.
The AmeriCredit purchase plugs what GM executives saw as a gap in the automaker’s operations as it prepares for an initial public offering of stock later this year or next year.
Lindland said the deal should make the anticipated stock offering “that much more successful, which in turn will get taxpayers more money back.”
The AmeriCredit transaction is expected to close by the end of this year pending the approval of AmeriCredit shareholders. AmeriCredit shares rose $4.21, or 21%, to $23.91 on Thursday.