DBRS Confirms General Motors Financial Company, Inc. at BBB (low), Trend Revised to Positive

DBRS, Inc. (DBRS) has today confirmed the Issuer and Senior Unsecured Debt rating of General Motors Financial Company, Inc. (GMF or the Company) at BBB (low) and the Short-Term Instruments rating of R-3. Further, the Guaranteed Senior Unsecured Notes rating of General Motors Financial Company of Canada, Ltd were confirmed at BBB (low) reflecting the guarantee from GMF. Concurrently, the trend on all ratings was revised to Positive. This rating action follows DBRS’s confirmation of General Motors Company (GM or the Parent) and the revision of the trend on GM’s ratings to Positive.

The ratings of GMF reflect the ownership of the Company and the strategic importance of GMF to GM as a provider of consumer and dealer auto financing. Moreover, the ratings consider that the predominant share of GMF’s business consists of financing GM vehicles and supporting GM dealers. Further, GMF has a support agreement with GM that requires GM to make a capital contribution should the Company’s leverage ratio exceed certain established levels. Accordingly, the overall long-term success of GMF, as a captive finance company, is highly dependent on the success of the Parent. To this end, DBRS views GMF’s relationship with and reliance on its ultimate parent as a key rating factor, thereby the ratings are linked and are likely to move in tandem.

The Positive rating trend reflects that of the Parent. Furthermore, the trend considers DBRS’s expectations that GMF will maintain solid operating performance despite a shift in the operating environment that includes normalizing credit costs and used vehicle values, as well as potentially higher interest rates. While the growth rate of U.S. auto sales volumes is likely to moderate in 2016, DBRS sees GMF benefiting from growing origination volumes supported by improving penetration of GM sales, and overall, healthy GM sales. Moreover, the trend considers DBRS’s expectation that GMF will make additional progress towards reducing asset encumbrance as unsecured funding becomes a larger presence in the overall funding mix.

Besides GM’s ownership, the ratings consider the intrinsic strength of GMF which benefits from the overall strengthening and evolving franchise, and the significant competitive advantages gained from the captive nature of the business. These advantages were evident in 2Q15 with GMF’s penetration rate of GM U.S. sales increasing to 30.2% from 8.9% in 2Q14, while retail origination volumes totaled $9.9 billion, a record for the Company. The quarter’s originations were supported by 2Q15 being the first full quarter that GMF was the exclusive provider of GM subvented leasing. While a positive for the franchise and current earnings, DBRS sees expanding leasing activities when used vehicle values are expected to moderate as introducing additional risk. However, DBRS expects that GMF will set residual values appropriately. Moreover, the recent announcement that GM subvented lending will shift to GMF further supports the expansion of the franchise, and the transition to a more prime quality lending portfolio.

GMF’s strengthening franchise underpins the Company’s expanding earnings generation capacity. For 1H15, GMF generated net income of $336 million, a 5% improvement over the comparable period a year ago. Higher leasing related income more than offset a lower financing margin, higher provisioning expense and growth in operating expense to invest in infrastructure and products necessary to be a full captive for GM. DBRS sees sustaining earnings growth as more challenging over the near-term, given higher provisioning expense due to the growing loan portfolio and as credit normalizes, lower financing margins as the loan portfolio shifts to more prime quality lending, and funding costs increase as GMF continues to advance towards a more unsecured funding mix.

Overall, GMF’s balance sheet remains sound. Credit losses continue to be near cyclical lows at 1.7% supported by the Company’s solid underwriting guidelines and strong servicing capabilities as well as still healthy used vehicle values. Liquidity is ample with GMF holding $12.9 billion of available liquidity at June 30, 2015, not including GMF’s borrowing capacity under GM’s corporate revolvers. Importantly for the Company’s intrinsic strength, asset encumbrance continues to decline as unsecured funding becomes a greater portion of the overall funding mix. Leverage (net-earning assets-to-tangible net worth) remains lower than the Company’s captive peers, but will likely expand over the medium-term as the earning asset balance grows with the improving penetration of GM sales.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Finance Companies (October 2014). Other applicable methodologies include Rating Companies in the Auto Manufacturing Industry (November 2014), DBRS Criteria – Rating Holding Companies and Their Subsidiaries (January 2015), and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Rating Committee Chair: William Schwartz
Initial Rating Date: 15 May 2014
Most Recent Rating Update: 4 September 2014

For additional information on this rating, please refer to the linking document under Related Research.