AmeriCredit Corp. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

AmeriCredit Corp. (ACF)

F1Q09 Earnings Call

October 27, 2008 5:30 pm ET

Executives

Caitlin DeYoung – Vice President, Investor Relations

Daniel E. Berce - President and Chief Executive Officer

Chris A. Choate - Chief Financial Officer

Analysts

Scott Valentin - Friedman, Billings, Ramsey & Co.

Robert Napoli - Piper Jaffray

Christopher Brendler - Stifel Nicolaus

David Raney – AKRE Capital

Presentation

Operator

Good afternoon, my name is Keith Austin and I will be your conference facilitator today. At this time I would like to welcome everyone to the AmeriCredit first quarter fiscal year 2009 earnings conference call. (Operator Instructions) I will now turn the call over to Caitlin DeYoung, Vice President Investor Relations.

Caitlin DeYoung

Good afternoon and welcome to AmeriCredit’s first quarter 2009 earnings conference call. With me today for the prepared remarks are Dan Berce, President and CEO, and Chris Choate, Chief Financial Officer. Also joining us are Clifton Morris, Chairman of the Board, and Steven Bowman, Chief Credit and Risk Officer.

Before we proceed I must remind everyone that the topics we will discuss during today’s call will include forward-looking statements that involve risks and uncertainties detailed in the company’s filings and reports with the Securities and Exchange Commission, including the annual report on Form 10-K for the year ended June 30, 2008. Forward-looking statements are based on the beliefs of the company’s management, as well as assumptions made by and information currently available to the Company’s management. Actual results and events may differ materially. We will be posting a transcript of the prepared remarks to our Web site shortly after we conclude today’s call.

I will now turn the call over to Dan Berce.

Daniel E. Berce

For our first quarter of fiscal 2009, we earned $412,000 on a pre-tax basis and reported a $1.7 million net loss. These results include a significant boost to our allowance for loan losses to 6.8% of ending receivables from 6.3% last quarter.

In our prepared remarks today, I will go over the results of key portfolio credit performance metrics for the September quarter and our outlook for future credit performance and loan origination activities. Chris will then provide you with an update on funding, liquidity, and the capital markets.

Now, starting with credit, increases in credit losses, delinquencies and deferments during the September quarter reflected typical seasonal deterioration exacerbated by the protracted slowdown in the economy.

Credit results were also affected by our plans to carry an elevated level of delinquencies and maximize our use of deferments to provide our customers the financial flexibility to navigate through the next few challenging months and into a seasonally better part of the year. We anticipate that these actions will minimize the ultimate losses in our portfolio.

Our recovery rate on repossessed collateral was 41.6% in the September quarter compared to 43.6% in the June quarter. Over the last several months, the Manheim Used Vehicle Index has been stable with values of large trucks and SUVs firming from their lows earlier in the year and values of compact cars softening slightly over that same timeframe.

As such, we expect recovery rates to remain in the low 40% range, subject to normal seasonal weakness in the December quarter.

As we head into what typically is our weakest quarter for credit performance, we expect to experience higher credit losses as an increasingly deteriorating macroeconomic environment continues to pressure our customer base.

As a reminder, our credit metrics have and will continue to reflect material upward pressure due to the denominator effect of a declining portfolio balance.

During the September quarter, we purchased $579.0 million of new originations, down from $780.0 million last quarter. The decline in originations volume is driven internally by our focus on preserving liquidity in light of the current capital markets environment and externally by a reduction in new and used car demand.

Earlier this year, in an effort to reduce origination volume, we significantly tightened credit guidelines and lifted the minimum required credit scores. While still early, key performance metrics, such as delinquency rates, on the 2008 vintage originations are encouraging.

During the September quarter, we were able to take advantage of the rapidly changing competitive environment to raise rates and the net fees we charge on loans while remaining selective on the quality of loan applicants we approved.

The weighted average coupon on the loans we originated this quarter was 16.6%, almost 100 basis points higher compared to our June originations. For loans we originated in the September quarter, we received net fees of 40 basis points compared to paying net fees of 74 basis points in the June quarter.

Finally, in light of uncertainty surrounding our access to the capital markets and our efforts to conserve liquidity, we have further decreased our origination target to approximately $100.0 million a month.

With many of our competitors scaling back or exiting the subprime auto finance space, even at this low origination run rate, we believe we will be able to maintain our national footprint and preserve our franchise value for when conditions improve.

I will now turn the call over to Chris Choate to discuss our balance sheet and capital and liquidity position.

Chris A. Choate

For the September quarter, we recorded a net loss of $1.7 million, or $0.01 per share.

On a pre-tax basis, we earned $412,000.

The provision for loan losses for the current September quarter was $275.0 million, or 7.5% of average receivables. The allowance for loan losses increased to 6.8% at September 30 from 6.3% at June 30, 2008. The increase in our allowance for loan losses reflects our expectations that the deteriorating economic conditions observed during the September quarter will result in further pressure on our consumer base.

Operating expenses for the quarter were 2.3% of average managed receivables. We expect to maintain an operating expense ratio, excluding restructuring charges, in the mid-2% range for the fiscal year even as our portfolio is forecasted to decline to approximately $11.0 billion by June 30, 2009.

Now turning to funding and the capital markets. The capital markets continue to be highly volatile and challenging for us to access. Nonetheless, we were able to execute our $500.0 million 2008-1 AMCAR securitization in early October. This senior-subordinated securitization had a weighted average coupon of 8.7%, compared with 6% on our last AMCAR securitization in May of this year.

Initial credit enhancement was 24.35% compared to 20.5% initial credit enhancement for our May securitization. We utilized our Deutsche Bank forward purchase agreement to place the triple-A rated securitization notes and pledged our double-A and single-A rated notes to our Wachovia funding facility, which we closed in October.

Subsequent to this 2008-1 transaction, we have $1.6 billion of available capacity on our Deutsche Bank forward purchase agreement to fund additional triple-A rated securitization notes issued by us through April 2009.

At this point, our Wachovia funding facility is fully utilized and cannot be drawn against in the future. While both the funding cost and our required capital investment in the 2008-1 transaction have increased dramatically and we have at best break-even profitability on the loans securitized, this transaction was critical in providing permanent financing for approximately $650.0 million of finance receivables.

The 2008-1 transaction substantially clears out loans we originated in calendar 2007, leaving primarily 2008 vintage loans on our subprime warehouse lines which were underwritten subject to our credit tightening initiatives implemented in late January 2008.

We are currently evaluating investor interest for another securitization prior to this calendar year end. While we anticipate the market appetite for subordinated bonds to remain limited and all-in pricing to be higher than the 2008-1 transaction we just completed, we expect credit enhancement levels to remain relatively stable.

As of the end of the quarter, we had $3.0 billion of warehouse credit facilities to support our subprime originations. At October 23, we have available borrowing capacity on these lines to fund $1.5 billion of subprime originations. These facilities are not scheduled to mature until October 2009.

We anticipate that the renewal process for these facilities may be challenging and our warehouse capacity may be reduced and the borrowing terms will not be as favorable as currently exist given the economic and capital markets conditions.

Additionally, we are in compliance with all warehouse covenants as of September 30. We are closely monitoring two covenants. One covenant requires that we maintain a portfolio net loss ratio of less than 8.5% of average receivables on a rolling six-month basis.

The other is an aging limitation in our $2.25 billion Master Warehouse Facility that requires us to buyback receivables that have been pledged to the line for more than 364 days. If we are unable to securitize additional receivables by May 2009, we may not have sufficient liquidity to repurchase these aged receivables from the warehouse facilities.

While we do not forecast breaching either of these covenants, if we were to breach them, our lenders could declare an event of default on our warehouse lines and, potentially, remove us as servicer of the portfolio. A declaration of an event of default in our warehouse lines would result in an automatic event of default in certain securitization transactions as well as our unsecured debt.

We are also monitoring a covenant in our Deutsche Bank forward purchase commitment that requires us to maintain a portfolio net loss ratio of less than 8% of average receivables on a rolling six-month basis. If we were to breach this covenant, we would be unable to utilize the remaining capacity in our Deutsche commitment.

Now, turning to liquidity, at September 30, we had $244.0 million of unrestricted cash, down from $433.0 million at June 30, 2008. And we have approximately $150.0 million of additional liquidity from borrowing capacity on unpledged eligible receivables at September 30.

At September 30, we had $112.0 million invested in The Reserve Primary Money Market Fund. Like other investors in the fund, we have not been able to access our money and have written this investment down to 97% of our principal investment.

The write-down of approximately $3.0 million was included in other income for the quarter. We have reclassified this investment from unrestricted cash to other assets at September 30.

We will continue to follow the events surrounding the liquidation of this fund and the return of our investment. It is our understanding that the investments in this fund are rapidly converting to cash and that we should start receiving a return of our investment in the near-term.

Also, during the quarter we retired $115.0 million of convertible notes that are puttable to us next month.

Looking ahead, we expect to maintain more than $200.0 million of liquidity, which should be sufficient to support our lower origination run rate. This forecast incorporates the following expectations:

First, we will retire the remaining $85.0 million of 1.75% convertible notes that we tendered for a week ago.

Second, our subprime warehouse lines may require approximately $100.0 million in additional credit enhancement by calendar year end. While the advance rates on our subprime warehouse lines are fixed at the inception of the agreement, they are dynamic with respect to credit performance. As portfolio credit performance deteriorates, we expect our credit enhancement requirements to increase.

Third, completion of securitization transactions is a net cash outflow at inception. The initial credit enhancement requirements on our securitization transactions are less advantageous than the advance rates on our subprime warehouse facilities. As such, our 2008-1 securitization transaction resulted in net cash usage.

Fourth, our forecast indicates that we will remain close to performance trigger levels on three of our securitization trusts for several more months and we may continue to trap cash to build to higher credit enhancement levels. One of these trusts, the 2007-D-F securitization breached its default trigger during the September quarter. And,

Fifth, we anticipate receiving distributions from The Reserve Primary Money Market Fund over the next several months.

Lastly, a few statistics, shareholders’ equity at quarter-end totaled $1.917 billion, book value was $16.49 per share at September 30. Managed assets to equity decreased to 7.3x at September 30, 2008, compared to 7.9x at June 30, 2008.

I will now turn the call over to Dan for some closing remarks.

Daniel E. Berce

As we enter what is typically our seasonally weakest quarter in terms of credit performance, we are mindful that this year’s seasonal influences will be more dramatic than in the past. Consumer confidence is at all time lows, unemployment is steadily increasing and the capital markets have remained stubbornly restricted.

Operating in this environment over the past year we have seen, and expect to continue to see, pressure on our portfolio credit performance and our liquidity position. We are proactively managing our liquidity position by continuously realigning our originations target to changes in the capital markets.

And we have rationalized, and will continue to rationalize, our infrastructure and operating expenses to our reduced originations target.

On the credit front, we are diligently managing our portfolio performance by increasing staffing and hours worked and optimizing the use of all the collection tools at our disposal.

While we expect to face challenging economic headwinds throughout 2009, we remain confident that our business model is viable and that it addresses a fundamental need of middle-market consumers. And, once the economy improves and access to the capital markets open back up, AmeriCredit is well positioned to take advantage of a much-improved competitive environment.

Until that time, we are committed to taking additional steps as necessary to protect and preserve the value of our franchise.

I will now turn the call back over to Caitlin.

Caitlin DeYoung

As a reminder to everyone, we will be posting a transcript of the prepared remarks on our Web site shortly after the call. Operator, this concludes our prepared remarks, and we are ready to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Valentin - Friedman, Billings, Ramsey & Co.

Scott Valentin - Friedman, Billings, Ramsey & Co.

You mentioned obviously the economy not cooperating, but how should we think about the level of loan loss reserves going forward? You mentioned about the percentages increasing because of the denominator effect and the seasoning of the portfolio, but yet the dollar amount could actually decrease. So I was curious, 6.8% is the reserve level today, in terms of projecting forward I would think maybe you see losses being higher than that going forward.

Daniel E. Berce

Obviously in our prepared remarks we indicated that we would see seasonally weaker performance in the December quarter and based on what we saw this quarter with weakness in economic conditions it would continue to pressure our consumer base, but again, the snapshot of the allowance is something we have to take every quarter based on the performance that quarter versus our expectations, what’s going on with the portfolio, what economic conditions have existed up to that point in time and so on.

Scott Valentin - Friedman, Billings, Ramsey & Co.

With regard to Arcadia, has there been any movement there in terms of them providing additional financial support?

Daniel E. Berce

No.

Operator

Your next question comes from Robert Napoli - Piper Jaffray.

Robert Napoli - Piper Jaffray

On the covenants regarding charge-off, it sounds like you’re going to be relatively close and you have this denominator effect in addition to weaker economic effects. Is there any allowance within those covenants for such items as a shrinking denominator?

Daniel E. Berce

The covenants, as written in the loan agreements, are fairly mechanical. There’s not exceptions for denominator effect, either way, growth or shrinkage.

Robert Napoli - Piper Jaffray

You are doing what you have to do. Essentially you are running the business in a semi-liquidation mode, just keeping the franchise as well positioned as you can, looking for some improvement in the economy and the capital markets. In that regard, what kind of conversations are you having regarding covenants, key covenants like that? You must be in contact, do you feel like you’re not going to hit those covenant, break those covenants at this point? It seems kind of risky.

Daniel E. Berce

We’re in discussions with our lenders literally every week because our major lenders are also the ones that monitor capital markets and securitization conditions for us. And we are totally transparent with our lenders in terms of where we stand and what our forecasts are. At this point, we don’t believe we are in any imminent danger of hitting that 8.5% covenant.

As Chris said in his remarks, it’s a rolling six-month average, so we’re well under it at this point. But obviously we’re going into our seasonally weakest period so we’re going to be watching it carefully and we will be communicating with our lenders as to what we’re seeing.

Robert Napoli - Piper Jaffray

Do you have a feel for what you think the fourth quarter charge-off rate will be?

Daniel E. Berce

It will be higher than the third, but it obviously depends on where the macro falls out. The denominator effect is going to be pretty powerful, but as I said, at this point we don’t believe we’re going to hit the 8.5%.

Robert Napoli - Piper Jaffray

Then you have book value per share of $16 and change. Do you feel like you can protect that book value over the next several quarters? How much of a decline do you think you could have in that book value per share over the next year?

Daniel E. Berce

If the past year is any guide, I think, that we can do a pretty good job of protecting book value, a year ago at September 30 we had a portfolio of $16.4 billion, tangible book value adjusted for the good will, book value was about the same as it is today. So we’ve basically run $2.3 billion off the portfolio, sustained book, while at the same time, in absolute dollars, increasing our loan loss reserve by $120.0 million.

So I think we have an excellent chance of preserving book over the next year as the portfolio continues to run down. Chris mentioned $11.0 billion June 30, 2009, and I think we can protect book well going forward.

Operator

Your next question comes from Christopher Brendler - Stifel Nicolaus.

Christopher Brendler - Stifel Nicolaus

On the cash position, can you just walk through the major changes to your cash forecast between last quarter and this quarter? I thought last quarter you said $300.0 million or $400.0 million for the year-end would be your forecast. Obviously the prima reserve fund is an unknown or a new surprise. Anything else that has hit your cash position this quarter that you weren’t expecting?

Daniel E. Berce

Really not this quarter other than that primary reserve fund. But our forecast looking forward, I think the key item that’s hitting our forecast is that we expect to have some true up on our warehouse lines related to credit enhancement that I mentioned in my remarks could be around $100.0 million or so. And that in and of itself would kind of be the delta from kind of the $300.0 million range we had previously discussed down to a kind of a $200.0 million range that we’re now targeting. Which, again as I noted, because we have reduced origination levels pretty dramatically down to $100.0 million or so run rate, we think is a very comfortable number to have.

Christopher Brendler - Stifel Nicolaus

On that topic, it just seems like the big risk for your company is that the warehouse line ended up being a problem and therefore you are stuck with loans you don’t have the cash to buy. So I would think that you would be closer to shutting off all originator’s activity to the extent you can, just to provide some protection against the worst-case scenario, which I think would be a bankruptcy filing. Bob’s question on the book value, in my opinion, is if you shut this thing down you could realize the cash out of the portfolio and get close to book. The real risk here seems like to be stuck with loans you can’t fund and therefore you’ve got a little more of a liquidity problem. And especially with the disclosure this quarter, you’ve got this 8.5% loss rate, is that a monthly rolling or a quarterly rolling?

Daniel E. Berce

It’s six months rolling.

Christopher Brendler - Stifel Nicolaus

But it’s based on monthly loss rates, not quarterly?

Daniel E. Berce

Correct.

Christopher Brendler - Stifel Nicolaus

That seems like it has definite potential to be an issue. What are your thoughts on just shutting down for a while because it’s destroying too much franchise value and maybe put those comments in light of the senior management departures you also announced today.

Daniel E. Berce

I think in terms of warehouse capacity, again in Chris’s remarks he mentioned that we had $1.5 billion of capacity left so at $100.0 million a month, I don’t think we’re running the risk of stretching our capacity.

Christopher Brendler - Stifel Nicolaus

I would agree. I’m worried about getting stuck with $1.5 billion of loans that all of a sudden get put back to you.

Daniel E. Berce

If ultimately things really go south and we hit that covenant, doing zero or $100.0 million a month between now and four or five months from now, isn’t going to move the needle much in terms of where we are in the warehouse lines.

Christopher Brendler - Stifel Nicolaus

Fair enough. And [inaudible] marks?

Daniel E. Berce

That’s just part of our overall streamlining of our organization, going from $800.0 million a month of originations at one point, down to $100.0 million. We have to cut costs and make difficult decisions and that was part of it.

Christopher Brendler - Stifel Nicolaus

So that doesn’t have anything to do with a change in strategy then.

Daniel E. Berce

No.

Christopher Brendler - Stifel Nicolaus

And the securitization, you mentioned the pricing could be higher and you also mentioned the securitization net cash outflow from the 08-1. Can you quantify how much that 08-1 cost you and possibly what the 08-2, if there is one, would you cost you in today’s market place?

Chris A. Choate

We’re really engaged in exploration, I guess, right now relative to what an 08-2 securitization would cost. I think it’s safe to assume that the cost of the subordinated bonds that we would need to get pre-placed would go up somewhat from what we were able to achieve with our Wachovia funding facility. So if we’re in this deal at just under 9%, it could go up to 10% or somewhere in that area. Again, it kind of depends on what we’re able to turn up relative to people that are interested for the sub-bonds and what those price points may be.

And the cash outflow is really just because we have initial enhancement in the securitizations in the mid-20% range and we have advanced rates on our warehouse lines that are still in the mid-teen% range, there’s just a net cash outflow when we move the receivables over from the warehouse line into the securitization transaction. But, again, that is outweighed by the benefit of clearing capacity on the lines.

Christopher Brendler - Stifel Nicolaus

Are you seeing any change in prepayment activities because I think that’s a key source of cash, is having the portfolio pay down. Are prepayments still running roughly the same rates or are you seeing less turnover in the auto industry of typing your prepayments?

Daniel E. Berce

No, over the last six to 12 months we have seen a slowing of voluntary prepayments, primarily because of less trade in activity.

Operator

Your next question comes from David Raney – AKRE Capital.

David Raney – AKRE Capital

Just a couple of more questions about the subprime warehouse line. Chris, I think you said in the event of default you could remove the servicer. Does that necessarily mean that the loans that are currently outstanding on the line also become callable as well?

Chris A. Choate

No, the loans are non-recourse but it means that at the election of the lenders they could essentially foreclose on the collateral and have someone else service that.

David Raney – AKRE Capital

But the loans, the automobile receivables, remain outstanding on the line, even if you violate, temporarily, the 8.5% net portfolio loss.

Chris A. Choate

Correct.

David Raney – AKRE Capital

So it’s not like those loans then have to be refinanced.

Chris A. Choate

No. it’s two things really happen. The lines become unavailable for future borrowing and there is the potential for a service or termination event. Not maybe likely but at least a potential.

David Raney – AKRE Capital

And what would be the incentive for the banks to do that?

Chris A. Choate

Don’t think there would be.

David Raney – AKRE Capital

Are there any adjustments to the six-month rolling calculation that are not obvious to us or is it just simply the average of this quarter and next quarter.

Chris A. Choate

As Dan said, it’s monthly calculation that just includes the most recent six months. And there’s nothing more complicated than that about it.

David Raney – AKRE Capital

So then we know what the first three months are.

Chris A. Choate

You know what the last six months are.

David Raney – AKRE Capital

As it relates to aging receivables, would you just walk through that again, on the $2.2 billion warehouse facility?

Chris A. Choate

Receivables can only stay on that line for 364 days. It’s built as a protection for the lenders, they want the stuff moving on and off the lines. And typically we have historically not been anywhere near that because we take receivables into the securitization markets but that access is obviously difficult at this point.

So with the securitization we did in October we essentially moved that issue out, as we said in our prepared remarks, kind of into the May/June timeframe. But there are some loans that would age to that point, beginning in May, that we would need to get into another securitization or have liquidity to get them back off the lines or that would also be a potential event of default.

Daniel E. Berce

If we were able to do one more securitization like the 2008-1, that would essentially move the aging out to October 2009, about the time that the lines come up for renewal anyway.

David Raney – AKRE Capital

And so you pointed out that this is an issue on the $2.25 billion warehousing line. You have a total $3.0 billion capacity.

Daniel E. Berce

It’s not a problem on the MTN that’s in [inaudible] and it really causes a step-up in enhancement but it isn’t the same type of liquidty.

David Raney – AKRE Capital

So can receivables be moved from the $2.25 billion warehousing line to the medium-term note or vice versa?

Daniel E. Berce

Yes, they can.

David Raney – AKRE Capital

And is that a way to manage that issue?

Daniel E. Berce

Potentially.

David, just one more question because we can take your questions off line but we want to leave the call open for others, too.

Operator

Your next question is a follow up from Scott Valentin - Friedman, Billings, Ramsey & Co.

Scott Valentin - Friedman, Billings, Ramsey & Co.

Is there any alternative securitization or is possible to sell loans, just to generate liquidity? And there has been some talk about some government assistance for some of the captive finance companies, buying auto loans. I don’t know if you’ve heard anything on that front.

Daniel E. Berce

The outright sale of loans would probably not be a liquidity event for us because I think it would be doubtful you could get more than the advance rates from a cash buyer today, the advance rates on our credit lines. Just the condition of the market is such.

And in terms of the government programs, we have been talking to lots of people about our issues and the overall funding issues, the capital market issues that are affecting us and subprime auto finance in general. I can’t tell you at all what the outlook would be for us to be included in any type of program, but we’re actively monitoring and engaged.

Operator

There are no more questions.

Caitlin DeYoung

This concludes AmeriCredit’s first quarter fiscal year 2009 earnings conference call. If you have any additional questions, please contact me. Thanks to everyone for participating in the call and for your continued support of AmeriCredit.

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