Saturday, July 23, 2005

Cars? What cars? GMAC makes more on mortgages, insurance

By Simona Covel / Dow Jones Newswires

Comment on this story Send this story to a friend Get Home Delivery

NEW YORK -- The General Motors Corp. financing arm may make most of the company's money, but lately that unit has less and less to do with financing car loans.

As car sales at the world's largest auto maker remain depressed -- though current heavy discounting could mean a short-term revival -- and borrowing costs jump because of its junk credit ratings, General Motors Acceptance Corp. is increasingly relying on profits from its mortgage and insurance financing units.

In the second quarter, net income from GMAC's financing operations slid $74 million from a year ago, or 16.4 percent, GM reported Wednesday, largely a reflection of lower net interest margins -- the difference between what a lender can charge and how much it pays on deposits. Higher interest rates and the narrowing in the difference between long-term and short-term rates took a bite out of earnings at myriad financial institutions last quarter.

Earnings at the company's mortgage operations, though, gained $19 million, and its insurance operations gained $25 million. Those two units helped GMAC to hold its overall net income decline to only 3.4 percent. In the second quarter, mortgage and insurance operations represented 54 percent of GMAC's profit. In 2002, those two segments accounted for less than a quarter.

"We expected that GMAC's earnings were not going to be sustainable at the levels that we've seen recently," said Craig Hutson, analyst at Gimme Credit in Chicago. "It's still a pretty good number and it still means they can pay a $2 billion dividend to GM."

It looks like GM is going to need it. In the second quarter, its North American auto business lost $1.2 billion. So far this year, that operation has shed $2.5 billion.

Whether GMAC is able to continue to prop up its ailing auto maker parent may be contingent on its credit ratings. Right now, with sub-investment grade ratings, GMAC is forced to either pay more to issue debt or to tap into nontraditional funding channels to finance its operations, like the market for asset-backed securities.

"GMAC has to go down in size or we have to improve our access" to the unsecured debt markets, said GMAC chief financial officer Sanjiv Khattri last week at an investor event in London.

One way to improve that access is for GMAC to detangle its credit ratings from those at its parent company -- a crucial step to lowering its funding costs if GM's tenuous credit ratings slide further into junk territory.

Moody's Investors Service, which rates GM Baa3 and GMAC a notch higher at Baa2, is the only major ratings agency to separate GM and GMAC ratings. Both Standard & Poor's and Fitch Ratings say the companies are too interdependent to warrant separate credit measurements. S&P rates GM and GMAC double-B, while Fitch rates the pair a notch higher at double-B-plus.

One way for GM to push its financing operation out from its parent's junk-rated shadow is to ring-fence GMAC, essentially creating a separate company that warrants separate ratings.

The company had tremendous success taking that step with its residential mortgage unit, now known as Residential Capital Corp., or ResCap. After its founding as an independent entity, wholly owned by GMAC, ResCap was able to quickly and nearly effortlessly raise $4 billion dollars in the unsecured bond market because of its solid business and consistent profits.

GM officials continually maintain that they are "exploring ways to improve GMAC's credit profile" without compromising the financing company's relationship with GM, as Khattri said last week. Officials, though, have declined to offer details or a timeline for the plan.