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AmeriCredit Remains Optimistic on Sub-Prime Auto Lending

AmeriCredit LogoAs pointed out by BNET auto industry analyst Jim Henry, U.S. auto sales for September fell 26.6% from the year-ago month, due to the credit crisis that's making it harder for some consumers to get auto loans and for automakers to finance their own operations. Operating results at Texas-based AmeriCredit Corp., which has focused predominantly on servicing sub-prime borrowers underscores why it will likely get even more problematic for those folks looking to access car financing. Late payments and loan charge-offs are rising, as indicated in the auto finance lender's annual filing for fiscal 2008:

  1. Accounts 31 to 60 day delinquencies were 6.0% at June 30, 2008, compared to 5.3% at March 31, and 4.7% last year. Accounts greater than 60 days delinquent were 2.9% at the end of the quarter compared to 2.3% at March 31, 2008, and 2.1% last year.
  2. The provision for loan losses increased to $1.1 billion for fiscal 2008, or 7.0% of average finance receivables, up from $727.7 million, or 5.3 percent, for fiscal 2007.
  3. AmeriCredit's stated policy is to charge off an account in the month in which the account becomes 120 days contractually delinquent if the related vehicle was not repossessed. The writedowns totaled $39.8 million and $39.4 million at June 30, 2008 and 2007, respectively.
In my opinion, the immaterial year-on-year increase in charge-offs is disingenuous, for the company offers flexible payment deferral plans to consumers late with payments. As a percentage of finance receivables, deferment levels (one to-four times) increased 490 basis points to 24.3% from the year-ago period.

Chief Executive Dan Berce assured analysts on the year-end earnings call that the company was being aggressive in protecting liquidity by lowering origination levels by two-thirds -- with plans to underwrite about $3 billion in new loans in its current fiscal year -- and that AmeriCredit was on track to achieve an unrestricted cash balance in the range of $300.0 million -- $400.0 million throughout fiscal year 2009.

In my opinion, the company could face liquidity problems in the coming months, with total debt of $14.6 billion running more than seven times shareholder equity and the possibility that two or three asset-backed securitization trusts could potentially trigger margin calls in 2009.

Berse summed up the current credit environment on the call when he said: "I don't think anybody ever thought the capital markets would be in the condition they're in today. So anything can happen in another 15 months -- I guess better or worse."

Could AmeriCredit soon join GMAC Financial Services, HSBC, and Triad Financial-- which have already retrenched from writing high-risk car loans?


This post first appeared in BNET's 10-Q Detective.

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