Auto Financer AmeriCredit Trips Loan Covenants

Obtaining an auto loan just got harder to do for those Americans in the market for used vehicles. AmeriCredit Corp., a leading lender of auto financing to those with sub-prime credit (scores less than 630), said it had breached the net charge-off covenant on its master warehouse facility above the ceiling limit of 8.5 percent for its six-month average default rate. This news comes as no surprise, as late payments and loan charge-offs have been rising for months. If the automobile finance company does not obtain a waiver of restrictive covenants, its warehouse line providers could declare an event of default, forcing accelerated debt repayments, removing AmeriCredit as a loan originator, and/or a cross default in other indebtedness, including about $750 million of unsecured corporate debt-effectivel y putting AmeriCredit out of business.

In my opinion, the company would have breached its covenant agreement last quarter, were it not for management's ability to temporarily suspend delinquent payments-and keep such accounts classified as current-through the use of [legal] loan deferments option, according to second-quarter 2009 regulatory 10-Q filing:

In accordance with our policies and guidelines, we, at times, offer payment deferrals to consumers whereby the consumer is allowed to move up to two delinquent payments to the end of the loan generally by paying a fee (approximately the interest portion of the payment deferred, except where state law provides for a lesser amount). Due to the nature of our customer base and policies and guidelines of the deferral program, approximately 50% of accounts historically comprising the managed portfolio received a deferral at some point in the life of the account.

This year's performance was adversely impacted, too, from the combined pressures of increasing unemployment and the pervasive economic slowdown-compounded by historically low recovery values on reposed vehicles sold at auction (37.1% compared with 41.6% in the September quarter).

Loan originations are typically more attractive in the higher-risk lending market, with the weighted average coupon on borrowings by the company of 17.1% for the December quarter. Offsetting the lucrative higher monthly payments in the last quarter, however, were the delinquency rates, which kept rising as a result of the recession (and related budgetary stress on the company's traditional customer): the 31 -to- 60 days delinquency rate increased 40 basis points sequentially to 7.8% at December 31 and greater than 60 days delinquent accounts increased 60 basis points to 4.2 percent from the prior quarter.

While Berce said the company did not relax its deferment policy, AmeriCredit did increase deferments during the December-quarter to approximately 8.2% of accounts outstanding, up from 7.3% last quarter, as more customers were in need of a deferral due to economic strains, such as job losses.

Management said in its 10-Q regulatory filing that its warehouse lenders did provide covenant waivers through March 9 and the company is negotiating with its credit providers to amend the lines of credit in exchange for some combination of reduced capacity, enhanced collateral, and/or re-pricing. Such a move, however, will likely lower the company's forward origination volume-adversely impacting operating profitability.

Even if AmeriCredit successfully restructures loan amendments, management admitted on the earnings call it does not expect improvement in the macroeconomic outlook in 2009. As such, the company is focused on maximizing cash collections from its portfolio and diligently navigating troubled credit markets to preserve capital and liquidity. In other words, the company is trying to avoid the repo man itself.