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GM offers 0% loans

2008-12-31 08:34

New York/Detroit - General Motors Corp and its GMAC funding affiliate launched programs on Tuesday to lure US car and truck buyers back into showrooms, as the nation's largest automaker tries to revive its sagging fortunes.

GMAC modified its credit criteria so that it could lend to a wider range of potential customers, two-and-a-half months after significantly curbing lending.

Meanwhile, GM is offering zero-percent financing on several vehicles, and rates no higher than 5.9% on more than three dozen 2008 and 2009 models. The offer expires on January 5. Many eligible vehicles also carry cash discounts of $500 to $4,250.

The changes came a day after the US Treasury Department agreed to take a $5 billion stake in GMAC, and lend GM as much as $1 billion to support GMAC, in an effort to help ensure that both survive.

"The bottom line is much better access to funding," said Mark LaNeve, GM's vice president for North American sales, on a conference call with reporters.

GMAC will now extend loans to retail customers with credit scores of 621 or higher, eliminating a restriction that required a score of 700.

Many analysts consider borrowers with a credit score of 620 or lower to be "subprime." The median U.S. credit score is 723, according to Fair Isaac Corp's myFICO unit.

GMAC has traditionally provided the bulk of financing for GM retail customers, and also financing that dealers rely on to carry vehicle inventory.

But it has struggled under the weight of $7.9 billion of losses in the 15 months ending September 30, largely tied to soured mortgages in its Residential Capital LLC unit.

Sales at GM had plunged 41% in November in part because many customers could not obtain financing from GMAC.

LaNeve said GMAC may now be able to fund 75 to 80% of new GM vehicle purchases, up from 40% since October.

The Treasury Department agreed to buy $5 billion of senior preferred equity in GMAC. It is lending GM up to $1 billion to let the automaker take part in a rights offering to support GMAC's reorganisation as a bank holding company, which won Federal Reserve approval on December 24.

GMAC is owned by GM and private equity firm Cerberus Capital Management LP. The government financing will result in both reducing their ownership stakes.

Government injection may help

GMAC is the latest non-bank financial company to qualify for help under the Treasury Department's $700 billion Troubled Asset Relief Program.

Unlike many lenders that received TARP funds, GMAC said it will use its money to provide affordable credit to consumers.

The $6 billion of financing is in addition to a potential $17.4 billion that the government committed on December 19 to help GM and smaller rival Chrysler LLC avoid possible bankruptcy. Cerberus also owns a majority of Chrysler.

"Federal aid to GMAC suggests the government is probably now so financially entangled in the GM complex that a Chapter 7 liquidation of (GM's auto operations) seems highly unlikely," JPMorgan analyst Himanshu Patel wrote.

GM's zero-percent financing is limited to buyers of the slow-selling sport-utility vehicles Chevrolet TrailBlazer and GMC Envoy, and three Saab models.

Rivals such as Toyota Motor Corp and Nissan Motor Co have offered similar financing on some vehicles.

LaNeve said GM's December sales were up "considerably" from November, and that the automaker might return to auto leasing, credited with supporting sales industrywide from 2000 until about 2006.

US auto sales have plunged to 25-year lows. Analysts do not expect them to recover substantially before 2010.

The cost of insuring $10 million of GMAC debt against default for five years fell to $1.4 million upfront plus $500,000 annually, according to Phoenix Partners Group, compared with $2.15 million upfront on Monday. Credit default swaps for Ford Motor Co's finance arm also declined.

GM's deeply distressed 8.375% bonds maturing in 2033 rose 1.8 cents on the dollar to 16.8 cents, yielding 49.9% to maturity, according to bond pricing service Trace.


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