AmeriCredit Corp. F2Q09 (Qtr End 12/31/08) Earnings Call Transcript

AmeriCredit Corp. (ACF)

Q2 2009 Earnings Call

January 29, 2009 5:30 pm ET

Executives

Caitlin DeYoung – VP IR

Daniel Berce – President & CEO

Chris Choate - CFO

Analysts

Sameer Gokhale - KBW
John Hecht – JMP Securities
Christopher Brendler - Stifel Nicolaus

Samuel Crawford – Stone Harbor
[Paul Steinborn – Plainfield]

David Raney – AKRE Capital

Presentation

Operator

Good afternoon, welcome to the AmeriCredit second 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 second quarter 2009 earnings conference call. With me today for the prepared remarks are Daniel 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 website shortly after we conclude today’s call.

I will now turn the call over to Daniel Berce.

Daniel Berce

Thank you Caitlin. We reported a net loss of $26 million or $0.21 per share for the second quarter of fiscal 2009. The loss principally resulted from a build in our allowance for loan losses to 7.1% of ending receivables to address the dramatic decline in vehicle wholesale values during the December quarter and our expectations that this weakness will persist well into calendar 2009.

The December 2008 quarter marked another very challenging quarter for AmeriCredit. Our primary focus has been on capital preservation and portfolio credit performance. We were successful in accessing the securitization market twice during the quarter to issue $1 billion dollars of securitization notes with the help of some non-traditional securitization partners.

With these transactions completed, we do not anticipate having to access the securitization market again until late 2009, at the earliest. As we highlighted in our first quarter earnings conference call in October, we have an 8.5% rolling six-month portfolio net credit loss covenant in our warehouse lines that we forecasted would be tight this time of year when we typically experience our weakest credit performance.

While results are not final, we anticipate that we may breach this covenant this month and are working with our warehouse line providers to obtain waivers and amend the warehouse facilities. Chris will discuss this amendment process and possible outcomes shortly.

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

Now, starting with credit.

Historically, the December quarter is our weakest quarter for portfolio performance. This year was no different. In fact, not only did credit metrics for the quarter reflect typical seasonal weakness, there was also pressure from increasing unemployment and the pervasive economic slowdown compounded by historically low recovery values on vehicles sold at auction.

Thirty-one to 60 days delinquency increased sequentially to 7.8% at December 31 from 7.4%on September 30. And greater than 60 days delinquent accounts increased to 4.2% from 3.6% last quarter.

Additionally, we granted deferments to approximately 8.2% of accounts outstanding during the quarter, up from 7.3% last quarter. While we did not relax our deferment policy, more customers are in need of a deferral due to economic strain. We believe that carrying a higher level of delinquency and greater use of deferments will maximize the ultimate collections from our portfolio.

For the quarter, our portfolio net credit losses were 9.5%. For the six months ended December 31, 2008, credit losses were 8.3%. Our recovery rate on repossessed collateral was 37.1% in the December quarter compared to 41.6% in the September quarter. The effect of lower recoveries added approximately 55 basis points to our December net credit loss rate and was driven by the falloff in demand for used vehicles at both the retail and wholesale levels, regardless of make or model, beginning in October.

The Manheim Used Vehicle Value Index is down 11.1% from a year ago and has recently recorded the worst annual decline in the Index’s 14-year history. We have seen some stabilization of auction values since the beginning of 2009 but expect recovery values to be historically weak well into calendar 2009.

Additionally the decline in the size of our loan portfolio is magnifying the impact of negative economic factors and recovery rates on credit results. By the end of calendar 2009, we expect our loan portfolio to decrease from the current $13 billion to approximately $9 billion. Holding all other variables constant, the decline in our portfolio has negatively impacted our December 2008 quarter net charge-offs by approximately 100 basis points and is forecasted to add another 100 basis points to our net credit loss rate by December 31, 2009.

We expect to see seasonal improvement in our credit metrics for the March and June quarters, but given the macroeconomic environment and continued seasoning of our portfolio, such improvement will be less than what we have normally seen.

On the originations front, we purchased $321 million of loans during the December quarter, down from $579 million in the September quarter. Credit tightening combined with a more favorable competitive environment, where many of our major competitors have pulled back or pulled out of the market all together, have improved the unit economics of the loans we have originated since early 2008.

Early delinquency results of the 2008 vintage originations are promising and we have continued to increase both the APR and net fees we charge. The weighted average coupon on the loans we originated increased to 17.1% for the December quarter, compared to 16.6% for the September quarter. Additionally, we received net fees of approximately 130 basis points, up from 40 basis points last quarter.

Earlier this week we made changes to our operational structure in line with lower expected origination volume including a reduction in our credit center network from 25 offices to 13. We believe that this new organizational structure lowers our cost of originations while still providing a high level of service and national footprint for our dealer-customers.

We anticipate maintaining our originations run rate of up to $100 million a month through calendar 2009. Future changes in our origination volume will be dependent on the stability of the securitization and bank lending markets and our ability to access the capital markets at reasonable rates.

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

Chris Choate

Thanks Daniel. For the December quarter, we recorded a net loss of $26 million, or $0.21 per share. As Dan noted earlier, the main driver of this loss is the increase in our allowance for loan losses to 7.1% of ending receivables from 6.8% last quarter. The provision for loan losses was $288 million for the quarter.

We recognized several unusual items through operating results during the quarter. First, we recorded a loss of $12 million primarily related to adjustments to the valuation of certain derivative positions we had outstanding with Lehman.

The derivative positions relate to certain floating rate securitization notes which we hedged to protect net interest margin. We were able to replace Lehman as the counterparty on these transactions during the quarter, however, during the time between the bankruptcy filing and when we were able to secure a new counterparty, rates declined resulting in a non-cash charge for the change in the fair value of these derivative positions.

Second, in December we agreed with Deutsche Bank to terminate their forward purchase commitment. We accelerated the recognition of $20 million of fees related to this agreement, which would have otherwise been recognized in the March 2009 quarter.

The total expense in the quarter related to this agreement was $37 million of which $27 million was non-cash amortization of warrants. We also recognized a $38 million gain upon the retirement of $108 million of senior notes and the repurchase of $39 million of our two and one-eighth percent convertible notes.

Operating expenses for the quarter were 2.5% of average finance receivables. We expect to maintain an operating expense ratio, excluding restructuring charges, in the mid-2% range for the remainder of the fiscal year even as our portfolio is forecasted to decline.

We anticipate restructuring charges of approximately $8 million to $10 million in the March quarter related to the operating changes Daniel referenced and an associated reduction in staffing in our originations and support functions. Now turning to funding and the capital markets.

On the securitization front, we had a busy and successful December quarter. We executed our $500 million 2008-1 AMCAR securitization in early October followed by another $500 million AMCAR securitization in November.

For our 2008-2 November transaction, we utilized our Deutsche Bank forward purchase agreement to place the AAA rated securitization notes. The AA and A rated securitization notes were purchased by Fairholme Funds as part of a broader series of transactions in which AmeriCredit issued to Fairholme 15.1 million shares of common stock in exchange for $108 million of senior notes held by Fairholme.

While the two securitization transactions we executed were costly, they allowed us to move aged receivables out of the warehouse lines and permanently fund approximately $1.3 billion of receivables. Based on our current originations run rate and because of the execution of these two securitizations during the quarter, we do not anticipate having to access the securitization market until late 2009, at the earliest.

We will continue to actively monitor the securitization market for signs of improved execution and economics. Specifically, we will closely monitor the TALF program, which is scheduled to be operational in February. This program is structured to provide liquidity to investors in AAA rated securitization notes.

While we have seen increased interest from potential investors in our future issuance of AAA-rated notes, we still need to identify investors for our subordinated bonds to execute a securitization at a weighted average cost of funds that makes economic sense for our business model.

At December 31, 2008, we were in compliance with all covenants in our warehouse facilities. As Daniel mentioned at the beginning of our conference call, we anticipate that we may breach the 8.5% portfolio net loss covenant in our warehouse lines at the end of January.

We are currently working with our lenders to restructure the warehouse lines and anticipate obtaining a temporary waiver for any non-compliance until an amendment of the lines is completed. We expect that an amendment will result in reduced warehouse capacity, consistent with our lower origination run rate, as well as lower advance rates and higher cost of funds more reflective of current market conditions.

Although we believe we will be successful in restructuring our warehouse lines, if we are unable to obtain an amendment to lift the net credit loss covenant, there are several possible outcomes. The warehouse line providers could restructure the lines to prohibit future borrowings, thereby resulting in an inability to fund new loan originations and the receivables that we have pledged to the warehouse lines would be used to pay down the outstanding balance of the respective facilities.

In the worst case, the warehouse line providers could declare an event of default, which would permit the lenders to accelerate the debt, foreclose on the collateral, and remove us as servicer. An event of default would also result in a cross default in our senior unsecured and convertible note issuances and certain securitization transactions.

Now, turning to liquidity at December 31, we had $376 million of liquidity consisting of $167 million of unrestricted cash and approximately $209 million of available borrowing capacity on unpledged eligible receivables at the end of the quarter. During the quarter, we received distributions of our investment in the Reserve Primary money market fund of $91 million leaving approximately $21 million invested in this fund.

Also during the quarter we retired the remaining $85 million of our one and three quarter percent convertible bonds and repurchased through the open market $39 million of our two and one-eighth percent convertible bonds at approximately 38% of par.

Looking ahead, we expect to maintain sufficient liquidity to support our current scale of operations. This forecast incorporates the following expectations. First, that the successful restructuring of our warehouse lines will result in lower advance rates on our lines in calendar 2009, negatively impacting liquidity.

Second, we will fully pay off the outstanding balance of our Canadian and lease warehouse facilities in May and June, respectively, which will use approximately $180 million in liquidity.

Third, our forecast indicates that we may breach certain performance triggers on several of our securitization trusts over the next year and trap cash to build to higher credit enhancement levels.

And fourth, we anticipate receiving lower distributions from trusts due to weaker credit performance.

Finally, a few statistics, shareholders’ equity at quarter-end totaled $1.978 million dollars, unchanged from a year ago. Book value per share was $15.03 at December 31.

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

Daniel Berce

Thanks, Chris. Over the past year, the recessionary environment has accelerated including increasing job losses, falling consumer confidence, a decline in demand for new and used vehicles, and the scarcity and high cost of funding and capital.

We are meeting these challenges directly by adjusting the scale of our business and creatively accessing the capital markets. We have also strengthened our balance sheet by retiring over $347 million of unsecured debt and increasing our allowance for loan losses by 150 basis points while adding over $200 million to tangible book value since last year.

We do not expect improvement in the macroeconomic outlook in 2009. As such we are focused on maximizing cash collections from our portfolio and diligently managing the business to preserve capital and liquidity.

Pivotal to our success in navigating 2009 will be restructuring our warehouse facilities to obtain covenant relief in light of the recessionary environment and the effect of portfolio seasoning. Once our warehouse line covenants are addressed, we believe our balance sheet will be positioned to effectively weather this economic downturn.

We will continue to execute our operating strategy which balances our short-term need to conserve capital and liquidity and our long-term goal of protecting the value of our franchise so that we are well-positioned to take advantage of the favorable competitive conditions once the economy improves and liquidity returns to the capital markets.

We are now ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Sameer Gokhale - KBW

Sameer Gokhale - KBW

I just had a question about the charge-off rate, you said you anticipate reaching that 8.5% trigger in this month and I was wondering if you could tell us how much lower the charge-off rate would have to be in order for you to not hit that trigger since we don’t have the monthly charge-off rate numbers.

Daniel Berce

The six month average through December 31 is 8.3 and just because of seasonality we’re going to be dropping off a lower number for the month of July. I can’t give you specifics but it clearly has to be less then 8.5.

Sameer Gokhale - KBW

I was just hoping to get that monthly numbers. The interest expense—

Daniel Berce

The trust data doesn’t come out until February 11 and if we, our 10-Q filing is expected February 6, 7, 8, something like that so you will know if we breach that covenant before the posting of January results.

Sameer Gokhale - KBW

As far as your interest expense there was an increase was that because of the expensing of the acceleration of the expensing of the warrants that flowed in through that line item?

Chris Choate

In addition to the $12 million charge associated with the derivative that I mentioned, that’s correct.

Sameer Gokhale - KBW

And then that 8.5% I just want to clarify, if that applies to your managed portfolio charge-off rate not the subprime only, right, based on the overall managed charge-off rate metric.

Chris Choate

That is correct.

Sameer Gokhale - KBW

You talked about what happens in a worst case the lenders declare an event of default but essentially do they get to seize any equity that you put into the warehouse or do you get that back over time once the warehouse lines are fully paid off.

Chris Choate

It’s the latter. In the worst case scenario which I described could involve the loss of servicing of that portfolio, it doesn’t mean that we lose the ownership of the receivables at the end of the day which the equity piece that could come back.

Operator

Your next question comes from the line of John Hecht – JMP Securities

John Hecht – JMP Securities

It sounds like you anticipate having to address some of the warehouse covenants, maybe could you give us more expectations for what you would have to address and where you are in terms of capacity in the warehouse and where you think that might go just to give us a sense where originations might go.

Daniel Berce

Capacity wise if we just focus on the master warehouse facility, we have outstanding borrowings on that of in the $700 million range right now, and we could maintain our $100 million run rate let’s say for all of calendar 2009 and not need much more then say a billion-ish of capacity under that line. So we believe that a restructured size of facility will allow us to keep operating it at the scale we’re at today.

John Hecht – JMP Securities

In addition to that you also have your unrestricted cash plus additional collateral on your balance sheet that you could pledge if I read the press release right.

Daniel Berce

That’s the first element of restructuring is the resizing of the line. There’s also likely to be a decrease in the advance rate meaning instead of the 85-ish its at now it will be somewhat lower. That would be a call on the liquidity in our balance sheet because we’d have to put that in either immediately or over a period of time.

And the third element of restructure would likely involve some repricing because that facility was priced before all the bank lending issues came up and the whole market has repriced since we originally put that in place.

John Hecht – JMP Securities

Okay so you have a few strings to pull and those are the strings you will move forward with in the negotiating it with the hopeful outcome of readdressing your warehouse lines.

Daniel Berce

Yes, the strength that we have in this negotiation is again, number one we don’t need $2.25 billion of master warehouse facility because we’re already at a much reduced scale. Two we do have some liquidity to provide to the lenders to give them a more secured position and three we can pay higher fees. We’ve modeled that out.

John Hecht – JMP Securities

I think we all don’t anticipate the ABS markets coming back to where they were a year ago, at least for the visible future, have you thought about what type of leverage turns and what type of credit spreads, they could come back to you to afford you some reasonable level of ROE given current yields and expected loss rates given your new underwriting.

Chris Choate

I think there are a lot of unknowns in that question short-term and long-term. In the short-term in our prepared comments we mentioned that some of the government programs such as the TALF could perhaps bring some new investors into the market which over time we think would certainly lower spreads back to levels that would be more desirable for us even on the AA and the A tranches.

Over time as the older portfolio runs off and we’re putting on a better risk profile book of business we think we can generate returns on the assets back to the 2% and north area, 2, 2.5% maybe. And if we’re able to generate some leverage on that maybe selling down to AA perhaps, hopefully A, then that gives us the leverage with some high yields that are convertible debt from time to time to get at least four to five turns of leverage on that and be double-digit ROE.

John Hecht – JMP Securities

To sell it down to the AA in that example, what type of spread to LIBOR would you expect?

Daniel Berce

That’s just a complete unknown at this time. Really our goals for the company at this point are to just hunker down, get the warehouse lines fixed, and get through 2009 calendar year at the scale of operations we’re at. A lot of things are going to change between now and the end of 2009 hopefully some of it is for the better.

John Hecht – JMP Securities

Can you give us a sense for the competitive environment, are there any small independents out there buying paper, what are the bigger banks doing, can you just give us a sense of that.

Daniel Berce

There is and there always has been buy here, pay here and small lenders that just kind of portfolio their own loans and really don’t have much debt but that’s not really the niche that we’ve always been in or always sought. Our niche, tremendous amount of capacity has left, complete lending platforms have gone away and the ones that are left are like us, at much reduced scale and part of that is because demand for used car sales is way down and obviously there’s not funding capacity to allow people to compete.

But the business right now is completely, the industry is a bit decimated competitively.

Operator

Your next question comes from the line of Christopher Brendler - Stifel Nicolaus

Christopher Brendler - Stifel Nicolaus

Can you discuss the [inaudible] inventory in the quarter, did you hold stuff over because of what happened in the auction market in December.

Daniel Berce

We always carry a bit more inventory at the end of December then we do throughout the rest of the year but we didn’t carry much more then normal at all and with respect to the auction markets in January I mentioned that they stabilized, in fact they’re better then they have been since the middle of October but they’re still no where near where we saw them in mid-2008.

Christopher Brendler - Stifel Nicolaus

You mentioned also that if you can get this warehouse line issue corrected, it sounds like its in everyone’s best interest to get that done in a way that keeps you afloat, does that, is that really the only remaining concern given your current cash position, if every securitization [inaudible], what are the other risks to your liquidity situation other then the warehouse line at this point. It sounds like you’re pretty comfortable that once you get the warehouse line done you should be able to get through 2009.

Daniel Berce

Yes, that’s right. I’d say the, we fix the warehouse lines, even with pretty pervasive trapping in the last half of 2009 our liquidity would be adequate throughout 2009. If the economy goes double bad into 2010 clearly that’s just another permutation that we’d have to look at.

Christopher Brendler - Stifel Nicolaus

Does it still, in terms of your plan right now and your leeway on a severe recession how close are you to going into runoff mode and selling down at originations or is that still not a good solution at this point, you still feel comfortable that you can still originate.

Daniel Berce

Yes, at this point, just because of the pricing dynamics in the market today coupled with what we believe is a pretty good risk selection from a credit standpoint the economics of the originations are decent with a pretty high cost of funds.

Operator

Your next question comes from the line of Samuel Crawford – Stone Harbor

Samuel Crawford – Stone Harbor

In terms of the customers that are increasing their requests for deferments is there much noteworthy credit migration going on in your portfolio whether you choose to describe that in terms of FICO or perhaps other qualities.

Daniel Berce

Clearly there is economic stress in our customer base which is reflected through higher delinquencies, higher defaults, and the fact that we’re using greater deferments. But as far as a quantitative view based on FICO’s, current FICO migration, it hadn’t been all that significant.

Samuel Crawford – Stone Harbor

Any particular qualitative mix change, change in composition of the households that are coming forward looking for assistance, anything like that that strikes you.

Daniel Berce

No, its, our defaults, delinquencies, deferments are mainly as they’ve always been, event driven, its customers losing their job or just getting over burdened with debt.

Samuel Crawford – Stone Harbor

How is the mix of vehicle that you’re financing now, is that changing in any noteworthy way over the last few months.

Daniel Berce

No.

Operator

Your next question comes from the line of [Paul Steinborn – Plainfield]

[Paul Steinborn – Plainfield]

Looking at last quarter it looked like you had [unpledged] receivables around $500 million—

Daniel Berce

No, we had $150 million last quarter. If you benchmark liquidity quarter over quarter September 30 we had $243 million of cash, $150 million of available borrowing so it was $393 million and this quarter its $376 million, whatever it is.

[Paul Steinborn – Plainfield]

Of the $209 million of unpledged receivables, how old would you say those are on average?

Chris Choate

Those are fresh receivables, originated in the last 60 days, 69 days. And in due course subsequent to quarter end we, due course normal treasury management we have borrowed against those.

[Paul Steinborn – Plainfield]

And then you mentioned before that you’re going to have to provide $100 million credit enhancements by the end of the year—

Daniel Berce

Some of that has been provided and some of it will be provided in connection with this restructuring.

[Paul Steinborn – Plainfield]

So we can anticipate that $209 million will come down significantly.

Daniel Berce

No the liquidity number is the one to look at, the $376 million.

[Paul Steinborn – Plainfield]

I’m saying the $209 million specifically of unpledged receivables, you’re going to have to go towards the credit enhancement.

Daniel Berce

We’ve already borrowed against those.

[Paul Steinborn – Plainfield]

Are they unpledged though, if you’ve already borrowed against them.

Chris Choate

They were unpledged at 12/31, we pledged them subsequent to 12/31. We really look at unpledged receivables and actual cash as [fundable].

[Paul Steinborn – Plainfield]

But those aren’t unpledged anymore is what you’re saying.

Daniel Berce

Correct. But there’s new ones that are unpledged. Its an evolutionary process.

[Paul Steinborn – Plainfield]

Of the 1.9 credit facilities right now, how much collateral do you have pledged to that.

Daniel Berce

The advance rates are currently 80% to 85%.

Operator

Your next question comes from the line of David Raney – AKRE Capital

David Raney – AKRE Capital

When you, could you give us any more color about the credit performance on the book of business that’s been originated either through 2008 or since the beginning of the June, July time period. You gave us a little information about average yields in seized, can you give us any sense for the credit performance.

Daniel Berce

It would probably be most insightful to look at originations we made from roughly about March 1 of 2008 on because the, January February were much like the late 2007 originations. But anyway from a [esthetic] pool development standpoint they’re looking like 2005-ish loans would be the best way I could describe it.

Profile wise I’ve said this before that underwriting profile wise, they should look like the 2003, 2004 but we’re in a very stressful economic environment which weakens performance and obviously those loans are pretty fresh and depending how the economy goes from there that could either influence them adversely or hopefully better at some point.

David Raney – AKRE Capital

Cumulative loss rates back in 2005 were well below 12%.

Daniel Berce

No, the 2005s were in that kind of 11, 12, 13% area.

David Raney – AKRE Capital

Are you seeing any difference in recovery values on cars that were financed through your specialty prime, near prime, or subprime programs. Do you see a difference in recovery?

Daniel Berce

Just as a percentage we typically get higher percentage recoveries, the better the collateral was to begin with. Meaning the newer the collateral was to begin with. So if you just purely look at percentages the legacy Long Beach and Bayview platforms would get a slightly higher percentage. But the per loan loss is high because it’s a higher ticket.

David Raney – AKRE Capital

But as far as the difference in recoveries, is it material enough, do you track that separately?

Daniel Berce

We look at it separately but we’re not originating those loans any more and, for modeling and reserve purposes we do track it separate.

David Raney – AKRE Capital

Any sense for percentage point difference? Because clearly as we—

Daniel Berce

It’s a marginal difference, a couple hundred basis points.

David Raney – AKRE Capital

When you look today at the performance of the Bayview and Long Beach legacy portfolios and then a couple of your [A part] deals, what in your mind is the relationship about the current, or cumulative loss rates across the three. That is if you were to think of subprime as 100% of the, on a scale factor, 100%, Bayview and Long Beach would be some percentage lower and so I’m trying to think about it on a relative basis. If the subprime would be the bulk of your portfolio—

Daniel Berce

The prime and subprime portfolios have deteriorated in a relatively similar manner meaning expected losses of Bayview were three, they are four now and I’m just saying that representatively so maybe up a third to a half and that’s about what the subprime book has done. The near prime book though has deteriorated at a greater rate then others and that’s I think part of, that consumer demographic has probably suffered more then others.

David Raney – AKRE Capital

And in your mind would that be likely what Florida and California exposure?

Daniel Berce

That’s right. And Arizona and Nevada.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Caitlin DeYoung

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

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