GM: Asset-Backed Securities Break Typical Analysis

| About: General Motors (GM)

I reported last week, in GM: Turbocharged By Subprime Under The Hood, on the deteriorating credit quality of the receivables on General Motor's (NYSE:GM) balance sheet. I noted the very large increase in receivables with a credit score under 540, up to over 78% from prior year, and the dropping of receivables with scores above 600.

Click to enlarge.

This leads one to ask the question: "Where did all these receivables go?"

The short answer is that they were sold off by securitizations as Asset Backed Securities. One can see on page 10 of GM's press release the category, "GM Financial finance receivables, net (including gross finance receivables transferred to SPEs of $3,357 and $3,295)" under current assets, and "GM Financial finance receivables, net (including gross finance receivables transferred to SPEs of $5,742 and $5,773)" under non-current assets on the Balance Sheet.

Selling receivables to a "Special Purpose Entity" is fine, as long as it is disclosed, and also allows the company to raise cash. Below is a table of how much GM has securitized each quarter from information found in its footnotes.

One can see for the Q1 of 2012 GM securitized just over $1.9 Billion dollars worth of receivables. With ABS investors getting burned with by subprime in 2008, lower credit quality receivables cannot be sold but higher quality still can. Hence, receivables with better credit scores are "disappearing" into SPEs.

Last Quarter GM held $8.5 Billion in SPEs, with it retained servicing rights for, up from $7.9 Billion the quarter before. One can see that GM takes about a 6% "haircut" on the sale of its receivables. The company makes about .7% servicing some of the receivables, and appears to also hold a residual interest in some of the trusts.

When one analyzes GM and its financial ratios one needs to add back in any receivables that have been securitized and increase current liabilities. This is the typical treatment of "selling" receivables but having the company retain the credit risk. Look at pages 378-381 of "The Analysis and Use of Financial Statements" by White, Sondhi, & Fried for more explanation.

One can see some financial sites such as Yahoo Finance and ADVFN do not do this. The databases I know of, are not smart enough to pick something out of the footnotes and adjust the financial statements; an analyst still has to do this by hand.

Besides adjusting the balance sheet and financial ratios this inquiry of GM's receivables brings up a question. Why would a company with $16 Billion in cash and $16.1 Billion in marketable securities, as of Dec 31, 2011, sell $1.9 Billion of receivables for cash and net $1.8 Billion?

The March 31, 2012 balance sheet shows cash at $17.3 Billion and marketable securities at $14.6 Billion. Maybe GM has certain covenants in its loan and debt agreements that it has to keep above a threshold in "liquid" assets. But the net amounts of cash and marketable securities actually decreased slightly over one quarter, so I find this conclusion to be unlikely. More likely this is a way to increase Cash From Operations.

Sondi & Fried write on page 379:

CFO must be adjusted; the change in the uncollected amount should be classified as cash from financing rather than CFO

In GM's quarterly filling the company just stated its CFO, without showing the steps taken to arrive at its figure.

In addition, I noticed a large jump of GM's inventory, which increased over $1.5 Billion in the quarter; from $14.3 Billion to $15.8 Billion. This large increase in inventory allowed GM to report better profit margins, which I will elucidate in the next article.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GM over the next 72 hours.

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