DBRS Confirms General Motors Financial Company at BBB, Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings of General Motors Financial Company, Inc. (GMF or the Company), including the Company’s Long-Term Senior Debt rating of BBB and Short-Term Instruments rating of R-2 (middle), and Support Assessment (SA) of SA1. At the same time, DBRS assigned to GMF a Long-Term Issuer Rating of BBB and a Short-Term Issuer Rating of R-2 (middle). The trend on all ratings was revised to Positive from Stable. This follows DBRS Limited’s change in trend of GMF’s parent, General Motors Company’s (GM or the Parent) ratings to Positive from Stable.

KEY RATING CONSIDERATIONS
The ratings of GMF reflect its ownership and its critical importance to GM as a provider of auto financing to consumers and dealers. The ratings also consider that the predominant share of GMF’s business consists of financing GM vehicles and supporting GM dealers. Furthermore, ratings also consider, GMF’s support agreement with GM that requires GM to make a capital contribution should the Company’s leverage ratio surpass certain established levels. As a result, DBRS has assigned a SA1 designation, which implies strong and predictable support from GM, if needed. Given the SA1 designation and GMF’s reliance on the success of its parent, the ratings are closely linked and will likely move in tandem. Furthermore, the trend considers DBRS’s expectations that GMF will maintain sound credit fundamentals. On an intrinsic basis, GMF has a solid and evolving franchise, a sound and improving risk profile, solid earnings generation, an improving funding profile and acceptable capital position.

RATING DRIVERS
Given the linkage between GMF and GM, an upgrade of the Parent’s rating would likely have positive implications for GMF. Additionally, if the Parent’s Positive trend is returned to Stable, a similar action would likely occur for GMF. Conversely, a negative rating action on GM would likely result in negative rating implications for the Company. Finally, any indication of a reduction of support from GM would likely affect DBRS’s SA and potentially have a negative impact on GMF’s ratings.

RATING RATIONALE
As one of the largest global auto finance companies, the Company maintains a solid and evolving franchise. Indeed, GMF’s strong and growing North America segment has benefited considerably from being GM’s captive finance company, where it is the exclusive provider of GM subvented leases and loans. Importantly, with its recent exit from the slower growth European markets, GMF is now able to focus its resources on the faster growth U.S. market. For 2017, the Company reported a 39.2% penetration rate of GM U.S. retail sales, up from 33.8% in 2016. Meanwhile, GMF’s share of GM U.S. dealer inventory financing (floor plan lending) was 20.2% for 2017, up from 15.9% for 2016. Reflective of its dependency on its parent, GM new retail sales accounted for 88.1% of GMF’s total U.S. origination volumes in 2017, up from 87.3% in 2016. Finally, given its full captive status, the franchise reflects strong earning asset growth, with retail finance receivables (net) totaling $31.9 billion at YE17, up from $25.6 billion at YE16, while commercial finance receivables (net) totaled $10.3 billion, up from $7.8 billion for the prior year. Furthermore, leased vehicles (net) totaled $42.9 billion, up from $34.3 billion.

GMF’s earnings power remains sound, despite headwinds that include higher interest rates, the maturing credit cycle and declining used vehicle values. During 2017, the Company’s earnings were negatively impacted by a loss related to GMF’s recently sold European operations. However, income from continuing operations before income taxes improved 57% YoY to $1.2 billion, driven by strong earning asset growth and improving efficiencies of operations.

GMF continues to maintain solid credit fundamentals. The Company’s risk profile remains sound, and its loan portfolio continues to migrate towards prime customers, reflecting its full captive status and increasing penetration of GM related loans and leases. Moreover, residual value risk remains well managed, despite declining used vehicle values. Meanwhile, although GMF remains reliant on wholesale funding sources, it has made substantial progress in reducing asset encumbrance by becoming less dependent on secured forms of funding, contributing to the improvement in GMF’s financial flexibility. Finally, DBRS views the Company’s capitalization as acceptable, especially given its sound credit profile.

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

The applicable methodologies are Global Methodology for Rating Finance Companies (November 2017), Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017) and Guarantees and other Forms of Support (January 2018), which can be found on our website under 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: Mark Nolan, Vice President, Non-Bank Financials – Global FIG
Rating Committee Chair: Mike Driscoll, Head of North American FIG, Global FIG
Initial Rating Date: 15 May 2014
Last Rating Date: 9 March 2017

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com.