Automotive News - December 1, 2008 - (Page 28) 28 • DECEMBER 1, 2008 INSIGHT Through D.C. din, Fed hears captives’ call Program has lent $10 billion to Detroit 3 units Jim Henry autonews@crain.com The Federal Reserve in effect has lent GMAC Financial Services LLC, Ford Motor Credit Co. and Chrysler Financial around $10 billion since late October. And it likely will lend billions more GMAC’s Robert Hull: “We’ve been forced to make painful choices about curtailing leases” and restricting lending. — so far, without the furor in Congress surrounding other proposals to help the U.S. auto industry. The loans help automaker finance companies replenish their cash to make car loans and leases and thus retain profits and market share. “If people think they can’t get financing, they’re not coming in,” says Marc Cannon, senior vice president of corporate communications at AutoNation Inc., the nation’s largest auto dealer group. AutoNation CEO Mike Jackson “has been saying since September that this credit issue is big.” Difficulty borrowing money has forced automaker finance companies, especially Chrysler Financial and GMAC, to originate fewer new leases and loans. At the dealership level, especially for Chrysler and GM brands, finance and insurance managers are scrambling to find alternatives such as regional banks. “We’ve been forced to make painful choices about curtailing leases and restricting certain retail lending while we look for new sources of capital,” Robert Hull, CFO of GMAC, said in a conference call last month. Neil Schloss: Ford Credit is using the Fed program as “a balance and as a backstop.” Raising cash Amount of commercial paper sold to the Fed by Detroit automaker finance companies as of Nov. 7 under the Commercial Paper Funding Facility program. GMAC Financial: $5 billion Ford Credit: $4 billion Chrysler Financial: $900 million markets globally.” Short-term fix The Commercial Paper Funding Facility program helps automaker finance companies raise cash only in the short term. Finding longer-term funding will be trickier. For example, GMAC Global Automotive Finance, a unit of GMAC Financial Services, lost $294 million in the third quarter, compared with net income of $554 million in the yearago quarter. Falling used-vehicle prices forced GMAC to increase its reserves for future losses. GMAC has had trouble borrowing money to make new consumer loans, so its newly written auto-finance contracts fell to $11.3 billion in the quarter from $14.5 billion a year ago. GMAC wants to change its legal status to a bank holding company, enabling it to qualify for a portion of the federal government’s $700 billion bailout fund for financial institutions. In a filing with the Securities and Exchange Commission, GMAC warned that if it fails to win bank holding company status, it could be forced to sell assets beyond its current plans. In turn, that would hurt the business, which ultimately could lead to GMAC not being able to pay its debts due in 2009, the company said. Fed weighs in On Oct. 27, the Fed launched a program called the Commercial Paper Funding Facility, aimed at thawing the market for commercial paper. Under the program, the Federal Reserve Bank of New York buys commercial paper and collects the interest. Commercial paper is one of the ways the captive finance companies raise cash, along with asset-backed securities and bank loans. Commercial paper is a form of short-term corporate IOU: Corporations borrow money to be repaid with interest on a set due date, typically within 90 days. So far, Ford Credit has registered $16 billion in commercial paper it could sell to the Fed. As of Nov. 7, it had sold about $4 billion. GMAC Financial Services has sold about $5 billion worth and says it plans to sell more. Chrysler Financial has sold about $900 million and also plans to sell more. “We’re using the CPFF program to be more of a balance and as a backstop,” in addition to other forms of funding, Neil Schloss, Ford Credit vice president and treasurer, said in a Nov. 7 conference call. As the credit crunch worsened since late summer, investors bailed out of commercial paper, especially longer-term paper, until it became difficult to sell commercial paper having a longer term than overnight. “At the end of the third quarter, the Commercial Paper Funding Facility didn’t exist,” Schloss said. Through August and September, he said, there was “significant pressure from the commercial-paper market and ‘Big step’ Big corporations other than domestic auto lenders are taking advantage of the government program, too. By Nov. 12, the Commercial Paper Funding Facility had bought $250 billion worth of commercial paper from all issuers, an increase of $23.9 billion from a week earlier. The Fed does not disclose individual transactions or identify which companies have sold commercial paper to the Commercial Paper Funding Facility, but every week the Fed does disclose the total amount it has purchased. “It’s obviously not a trivial source of demand here,” says Michael Feroli, an economist for J.P. Morgan Chase. He estimates that the Commercial Paper Funding Facility already represented around 15 percent of the overall commercial-paper market — after less than three weeks in existence. Says Feroli: “Would the Fed have done this in a normal period? Clearly, no. It’s a big step.”c CSO http://www.powerpusher.com http://www.powerpusher.com http://www.cso.com http://www.cso.com
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