AmeriCredit F2Q08 (Quarter End 12/31/07) Earnings Call Transcript

AmeriCredit Corp (ACF)

F2Q08 Earnings Call

January 22, 2008 5:30 pm ET

Executives

Caitlin DeYoung – Vice President Investor Relations

Daniel E. Berce – President, Chief Executive Officer & Director

Chris A. Choate – Chief Financial Officer, Executive Vice President & Treasurer

Clifton H. Morris, Jr. – Chairman of the Board

Steven P. Bowman – Chief Credit & Risk Officer

Preston A. Miller – Co-Chief Operating Officer

Mark Floyd – Co-Chief Operating Officer

Analysts

John Hecht – JMP Securities, LLC

David Hochstim – Bear, Stearns & Co.

Sameer Gokhale – Keefe, Bruyette & Woods

Carl Drake – SunTrust Robinson Humphrey

Chris Brendler – Stifel, Nicolaus & Company

Scott Valentin – Friedman, Billings, Ramsey & Co., Inc.

Robert Napoli – Piper Jaffray & Co.

Jordan Hymowitz – Philadelphia Financial

David Rainey – Akre Capital Management

Presentation

Operator

At this time I’d like to welcome everyone to the AmeriCredit second quarter fiscal year 2008 earnings conference call. (Operator Instructions) I would now like to turn the call over to Catlin DeYoung, Vice President of Investor Relations. Please go ahead.

Catlin DeYoung

Good afternoon and welcome to AmeriCredit’s second quarter fiscal year 2008 earnings conference call. With me today for the prepared remarks are Dan Berce, President & CEO and Chris Choate, Chief Financial Officer. Also joining us are Clifton Morris, Chairman of the Board; Steve Bowman, Chief Credit & Risk Officer and Co-Chief Operating Officers Mark Floyd and Preston Miller. Before we proceed I must remind everyone that the topics that we will discuss during today’s conference call will include forward-looking statements that involve risks and uncertainties detailed in the company’s filings and reports with the Securities & Exchange Commission including the annual report on Form 10K for the year ended June 30, 2007.

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 on our website shortly after we conclude today’s call. I will now turn the call over to Dan Berce.

Daniel E. Berce

As you have seen from our earnings release earlier today we recorded a loss of $19.1 million for the quarter or $0.17 per share. The December quarter was challenging on many fronts. Our portfolio exhibited weak credit performance and uncertainty continues to linger in the capital markets. With this backdrop we are taking steps to strengthen our balance sheet and conserve liquidity. We have increased our allowance for loan losses and have implemented a plan to moderate our cash uses by reducing new loan originations.

In our prepared remarks today I will cover our portfolio credit performance, what trends we have noted and our expectations for credit performance over the next couple of quarters. Chris will then provide you with an update on funding and the capital markets. Finally, I will share with you our revised operating plan for calendar 2008 and the impact on fiscal year 2008 guidance.

Now, let’s start with credit. All of our key performance metrics deteriorated beyond our normal seasonal expectations during the December quarter. While our specialty prime [bayview] portfolio continues to perform in line with our expectations, we experienced higher than expected credit losses in our subprime and near prime portfolios. Credit deterioration occurred during the first two months of the quarter and accelerated in December. Net credit losses were 6.9% in the December quarter. Excluding Long Beach, net credit losses increased to 7.3% from 5.8% a year ago. Net credit losses were 5.4% in the September quarter. 31 to 60 day delinquencies were 6.8% at December 31, 2007 compared to 5.5% last quarter. Excluding Long Beach 31 to 60 day delinquencies were 7% compared to 6.7% a year ago. Accounts greater than 60 days delinquent at the end of quarter compared to 2.6% at September 30^th. Excluding Long Beach accounts greater than 60 days delinquent increased to 3.2% from 2.6% last year.

As discussed by AmeriCredit and others in our industry, over the past several years when the macroeconomic environment was more favorable we increased the volume of loans with higher loan-to-value and longer terms, as did our competitors. We continue to believe that there is minimal additional frequency risk related to the expansion of average loan terms to 72 months. Loans with higher LTVs carry higher potential losses and the increased credit risk of these loans was factored into our decision to originate them. The factors that we’ve seen impacting our credit performance this quarter were not specific to higher LTVs or longer term; they were more macroeconomic in nature. Specifically, regional performance in Florida deteriorated significantly in the December quarter compared to previous quarters.

Although we have yet to see a material deterioration in homeowner performance relative to non-homeowners in this area, this region has seen significant corrections in the housing markets and increases in state level unemployment. Certain pockets of the northeast and southern California have also experienced moderate but notable deterioration and performance. Additionally, we have observed a general softness in overall payment rates which we believe could have been impacted by increased budget constraints on our consumers. We have also experienced weaker than seasonal recovery rates as a result of increased dealer electives to build inventory going into the spring sales season due to anticipated lower consumer demand.

In addition, as we discussed in our earnings conference call last October, we continue to transition the servicing of our Long Beach portfolio from Orange, California to our Arlington operation center during the December quarter. This transition was completed yesterday. We experienced a negative impact related to our integration activities during the December quarter but, expect the adverse affect on credit results will dissipate gradually over the next several months.

Over the remaining two quarters of this fiscal year we project a seasonal improvement in loss frequency offset partially by some continuing deterioration in used car prices at auction. As a result we expect net credit losses to show some improvement in the March quarter and more significant improvement seasonally in the June quarter. I will now turn the call over to Chris Choate to discuss our balance sheet and capital liquidity position.

Chris A. Choate

We recorded a $19.1 million net loss for the quarter. This loss resulted primarily from an increase in our provision for loan losses. Our provision for loan losses of $357 million covered actual losses realized during the quarter of $286 million and a $71 million increase in the allowance for loan losses to 5.6% of ending receivables as of December 31. Provision for loan losses for the quarter was 8.6% of average receivables compared to 5.6% a year ago. Provision for loan losses was $245 million or 6% of average receivables in the September quarter. The increase reflects our expectations that credit losses for the fiscal year will come in between 5.7 and 6.2% which is 120 basis points above our previous guidance.

Now, turning to funding in the capital markets. We have seen unprecedented uncertainty in the capital markets since the summer of 2007. This uncertainty increased in November when the rating agencies questioned the AAA rating status of certain bond insurers. Our securitization program predominately utilizes bond insurance to provide a cost effective way to obtain a AAA rating on the securitization bonds we issue. Historically, we have utilized five different bond insurers. The viability, available capacity and market acceptance of several of these insurers are now questionable. We have entered into an arrangement with FSA four $4.5 billion in capacity for our core subprime and AMCAR securitizations throughout calendar year 2008. In exchange for this capacity, future transactions insured by FSA will have insurance premiums approximately double what we paid in our September securitization and higher credit enhancement requirements.

I want to emphasize this arrangement is an offer of capacity and not a commitment and, as with all prior deals we’ve done with any insurer, each future transaction with FSA will be evaluated by FSA on a deal-by-deal basis as the timing, collateral composition, size, market condition and other factors. We anticipate that initial credit enhancement in our AMCAR securitizations will be in the mid teens with target credit enhancement in the low 20% range. The higher credit enhancement levels will be driven predominately by the higher attachment point that FSA is requiring and to a lesser extent by the credit trends that we are experiencing in our portfolio. Historically, the level of credit enhancement required by the bond insurers and our securitizations support a shadow rating to the bond insurer or an attachment point of BBB. The insurance policy provided by the bond insurer then allows for the actual rating on the securitization notes to be AAA. The attachment point also determines the amount of capital the bond insurer is charged. As bond insurers try to preserve more of their own capital, FSA is requiring us to increase the amount of credit enhancement we provided in a transaction to obtain a single A- shadow rating. This way FSA will be able to allocate less capital to guarantee the securitization notes at AAA. We do not have similar arrangements for bond insurance for our prime, near prime APART securitization platform. We will evaluate future APART transactions to determine whether bond insurance or the use of a senior subordinated securitization structure is more effective and economical.

As for upcoming transactions, we anticipate entering the securitization market during the March quarter with an AMCAR securitization transaction. Details of the transaction will not be determined until closer to the transaction date. There have been several prime auto securitization transactions executed effectively since the beginning of the month. However, we anticipate a non-prime deal may be somewhat more challenging to execute. Based on what we have seen we expect credit spreads to widen substantially from our September, 2007 transaction but with benchmark rates down, the all end costs is forecasted to be only marginally higher than the securitization transactions we completed this past fall.

As Dan discussed previously, we are experiencing weaker credit performance on our near prime collateral. Earlier this month three Long Beach securitizations: the 2006 A, 2006 B and 2007 A transactions breached their level one delinquency triggers. As a result, the total credit enhancement requirement has increased by 5% for each transaction. As part of the arrangement with FSA that I discussed earlier, we have agreed to use excess cash flows from our current FSA insured AMCAR and Long Beach securitizations to help fund these higher credit enhancement requirements. We anticipate that it will take four to six months to build credit enhancements up to the new requirement and will temporarily delay $40 to $50 million of cash distribution we had expected to receive during that time frame.

We are keeping a close watch on the performance of the 2007 2M APART transaction that we completed in October due to its high concentration of Loan Beach collateral. We expect that we may hit a level one performance trigger in this transaction within the next two quarters. We are also monitoring the performance of our 2006 and 2007 AMCAR transactions with respect to performance triggers given the deteriorating macroeconomic environment. Based on our current forecast we do not expect these transactions to breach their performance triggers during the remainder of our fiscal year.

Turning to liquidity; at December 31 we had $567 million of unrestricted cash down from $637 million at September 30. The decreasing cash primarily resulted from the funding of $45 million of lease originations in the December quarter and the fact that we did not draw $30 million of unborrowed capacity on our warehouse lines based on available collateral at year end. We also have $2.9 million of available warehouse capacity. As a reminder, of our total $5.4 billion in warehouse lines, our two largest subprime warehouse facilities totaling $3.25 billion of credit will not mature until October, 2009. We are in compliance with the warehouse covenants in all of our facilities. Also, we continue to work on a facility to fund out lease originations and expect to have that in place by fiscal year end. In the meantime, we have substantially slowed lease originations.

Finally, as a means to conserve liquidity, we did not repurchase any stock during the December quarter and will not seek to repurchase any additional stock in the short term until the funding and capital market environment stabilizes. We continue to model various stress scenarios to assess the impact to our capital and liquidity position. Included in our analysis is the impact of cash trapping in our Long Beach securitizations, higher required credit enhancement levels and a generally weaker credit environment. Based on our analysis we have revised our operating plan.

I will now turn the call over to Dan to discuss these revisions.

Daniel E. Berce

As you can see we are currently faced with two main issues: weaker credit performance that will impact incoming cash flows and profitability in our business; and structural changes in our funding platform, primarily the requirement for higher credit enhancement levels in our securitizations. Recognizing these challenges, we are reducing our loan originations target for calendar year 2008 to $5 to $6 billion. This translates into loan origination plans for fiscal year 2008 of $6.5 to $7 billion. Despite the reduction in our lending volumes we will continue to offer a full spectrum of financing options including specialty prime, near prime and subprime financing products to key dealers, especially larger dealers and dealer groups in major markets.

We are also committed to a continuing presence in Canada but will be reducing volume from our leasing and direct lending platforms. We will accomplish our volume reduction through a combination of credit tightening, reduction in the number of dealers we do business with and a reduction of our sales force. We will also consider competitive and regional performance metrics in each geographical area in assessing our appetite in different markets. Relative to our dealers, we will evaluate each relationship based on efficiency, credit performance and profitability.

One positive change in our environment is the potential for improved competitive conditions and the opportunity to increase pricing and net interest margins in light of the fact that several of our competitors are scaling back their origination objectives, tightening credit, or in some cases seeking to exit the space entirely. Over the next several months we will bring our origination staffing levels and branch count into alignment with our revised originations target. This realignment will include changes that result from the continued integration of Long Beach acceptance as well as other staffing reductions deemed necessary to meet the needs of our new target.

From a servicing perspective, as we announced last fall, we closed our Long Beach collections center in Long Beach, California yesterday and integrated that collection effort into our Arlington operation center. Our remaining collection, operation and centers will not be affected by the planned reduction in originations. Finally, we expect a small amount of staff reductions in our general and administrative functions. We will continue to evaluate our cost structures and look for ways to achieve operating leverage despite lower origination levels and a declining portfolio balance in the near future.

Now, turning to guidance; the primary purpose of our operating plan revisions is to strengthen our balance sheet and conserve liquidity. Over the past several months we have modeled numerous scenarios including increases in required credit enhancements on future securitizations transactions and decreases in cash distributions from our portfolio caused by higher credit losses and breaches of performance triggers in our Long Beach securitizations. Based on our various models we believe that reducing loan origination volume to $5.6 billion for the calendar year will provide us with significant liquidity to operate our business even if economic conditions weaken. On the other hand, if the capital markets continue to deteriorate or if economic factors drive even weaker credit performance, we will have to further revise the scale of our operations.

We forecast net income for 2008 to be between $170 and $195 million with earnings per share of $1.35 to $1.55 per share. We will take a restructuring charge of approximately $10 million over the next two quarters. Our earnings forecasts are based on the following revised factors for the fiscal year: origination volume of $6.5 to $7 billion, net interest margin of 10.5 to 11% of average receivables, operating expenses excluding depreciation on leased vehicles of 2.5 to 2.7% of the portfolio, credit losses of between 5.7 and 6.2% and provision for loan losses as a percentage of average receivables of between 5.8 and 6.3%. In conclusion, as we look ahead into 2008 we are confident that we are doing the right things to position the business to weather this difficult environment. In recent quarters we have seen the capital markets unravel and credit performance worsen in our portfolio. We have raised rates, tightened credit and reduced certain less profitable origination tiers. Now, we are taking even more dramatic steps to raise the credit profile and potential profitability of future loan originations. We will continue to monitor the performance of our portfolio and the ever fluid capital markets to determine if additional adjustments to our business model are needed.

We are committed to doing what it takes to protect our franchise as we go through the economic cycle and build liquidity to take advantage of a more favorable economic and competitive environment once the economy troughs. I’ll 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 website 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) We’ll go first to John Hecht with JMP Securities.

John Hecht – JMP Securities, LLC

Chris, you highlighted a few trusts that had reached their L1 triggers. What were those specific pools?

Chris A. Choate

They’re the Long Beach 2006 A & B and 2007 A transactions and they have hit level one delinquency triggers.

John Hecht – JMP Securities, LLC

So, the delinquency is [inaudible]. What can you talk about on the subprime side in terms of capacity port triggers thus far in to the month here?

Chris A. Choate

I think I mentioned in my remarks that based on our current forecast where we expect credit to perform that we don’t anticipate hitting any level one triggers in our subprime securitization transactions this fiscal year but, that we have some expectation we may hit a trigger in our near prime APART transaction that we did in October of 2007.

John Hecht – JMP Securities, LLC

With respect to the warehouse lines are there any covenants with respect to achieving some level of GAAP earnings for anything to happen?

Chris A. Choate

No. The only couple of covenants – we had some financial covenants in our warehouse lines. We had a tangible net worth covenant that we’re in compliance with and actually have a fair amount of room. Then, we have an EBITDA, an interest coverage ratio EBITDA to interest that we are likewise in compliance with.

John Hecht – JMP Securities, LLC

Based on the math that you guys have given out for your forecast I’m assuming the non-accretive acquisition fees are somewhat stable [inaudible] last quarter. And, if you assume that then given your guidance it looks like you are holding your reserves at 5.4, 5.5% to average receivables the way it rolls through the analysis which would infer that you’ve built most of the reserves this quarter. Is that a fair statement based on what you’re seeing now? Or, is there something else to think about in the model?

Chris A. Choate

No, that’s a fair statement.

Operator

We’ll go next to David Hochstim with Bear, Stearns.

David Hochstim – Bear, Stearns & Co.

Could you talk a little bit more about what you’ve seen geographically and by any other borrower characteristics in terms of the deterioration in the quarter in terms of credit and types of vehicles? Then, the second question is I think you have a convert that is [putable] later this year. I was kind of just wondering what happened with that? It think it’s about $200 million.

Chris A. Choate

I’ll take the second one first and then Dan can go with the geographic question. We do have a $200 million convert that comes due, or where we’re trading now will be put to us in the month of November later this year and our liquidity planning and modeling which is driving our view of appropriate origination levels clearly contemplate that we will have cash on hand, funds on hand to retire that when it is put to us this fall.

David Hochstim – Bear, Stearns & Co.

And, it can’t be put before November?

Chris A. Choate

No.

Daniel E. Berce

David, with respect to your first question, we saw deterioration to some extent across the board. But, it was most notable in some regions of the country, I think Florida for instance, really all parts of Florida performed very poorly this quarter. I mentioned parts of the north east, New Jersey, Massachusetts, Pennsylvania and then to some extent southern California. The profile of the borrower it really wasn’t homeowners per say, it was spread between homeowners and non-homeowners proportionately. There weren’t any particular credit tiers that stood out from others. But, again, Florida in particular was a very, very poor performer.

David Hochstim – Bear, Stearns & Co.

Was there any vintage loans? Or, the newer loans?

Daniel E. Berce

Not particularly.

David Hochstim – Bear, Stearns & Co.

New cars? Used cars?

Daniel E. Berce

No.

David Hochstim – Bear, Stearns & Co.

Gas guzzlers?

Daniel E. Berce

No.

Operator

We’ll go next to Sameer Gokhale with KBW.

Sameer Gokhale – Keefe, Bruyette & Woods

I was actually curious about the AMCAR securitizations. I know you don’t plan on hitting any of the triggers in the subprime AMCAR securitizations. But, if you do, it seems like you’re close to hitting some of those triggers, would it be possible or have you had discussions with the guarantors as far as maybe paying them something extra in order to amend those triggers? Does that remain a possibility? I seem to recall that you did something like that back in 02 or 03. Then, I have a follow up question.

Chris A. Choate

That is always a possibility. Again, just right now we don’t forecast that that’s going to be a necessity. But, a couple of the deals will likely come fairly close to the level on triggers and we’ll just have to evaluate what the amount of enhancement step up would be and whether we’re in a position to seek a waiver or a lift of that level one trigger at that point in time.

Sameer Gokhale – Keefe, Bruyette & Woods

Okay. Then, you mentioned in your comments that if you were to do a new securitization that was a wrap deal, the cost of the wrapper seems to have doubled and then you’re required to put in more credit enhancement perhaps approaching like a 20% mark. At those kind of economics wouldn’t it kind of make more sense to do a senior sub deal? Or, would that still be more expensive than these new economics of doing a wrap deal?

Chris A. Choate

It’s not so much about the economics. I mean clearly, we will evaluate the senior sub market as we go along but, where we are right now it would just be the difficulty of placing anything below AAA and without a wrap there’s some consideration that even placing the AAA bonds might be difficult. So, I think it has more to do with market acceptability than economics or pricing.

Sameer Gokhale – Keefe, Bruyette & Woods

Then, my last question was in terms of the cash that you have on balance sheet, the unrestricted cash, given your operating plan for the fiscal year where do you see your cash and cash equivalent ending of the year at? Should we assume given your lower origination targets that you’re actually building up cash? Do you have an internal forecast for that?

Chris A. Choate

We would anticipate cash in the near term decreasing primarily because we would be funding much higher credit enhancement levels than we have in the past. As Chris said, we anticipate funding the convertible debt in November. But, at some time late in the fall into 2009, cash will begin to build again.

Operator

We’ll go next to Carl Drake with SunTrust Robinson Humphrey.

Carl Drake – SunTrust Robinson Humphrey

I was wondering if you could talk about the new accumulative loss expectations for subprime as well as near prime in the portfolios? And, if you could clarify, you mentioned near prime has deteriorated. Was that just the lower tier of the Long Beach portfolio? Or, is that all Long Beach?

Chris A. Choate

I think as we talked about on the September call, the lower tiers had exhibited poor performance. That continues to be the case. The upper tiers were a bit weaker this quarter in our near prime portfolio.

Carl Drake – SunTrust Robinson Humphrey

What would be the new accumulative loss expectation for the books of business?

Chris A. Choate

We’ve made credit changes several times during 2007 and of course, new originations now are going to be subject to the revised operating plans so, it really varies almost by quarter and by month.

Carl Drake – SunTrust Robinson Humphrey

I guess Dan, you had mentioned that the 06 vintages looked like 11.5 to 13% I believe, in some of your presentations and I was wondering if you’ve updated your thinking.

Chris A. Choate

I think we had said 12 to 13 for the 06 and suffice it to say it’s even a step higher than that now.

Carl Drake – SunTrust Robinson Humphrey

What about for the near prime book? Where would estimate accum losses would end up?

Chris A. Choate

Well, the Long Beach portfolio is again, because of the servicing transition we’re looking for some stabilization as we move it into Arlington and subject to our servicing processes. So, I think we can be more articulate on that soon.

Carl Drake – SunTrust Robinson Humphrey

Okay. In terms of additional sources of capital is it available to get financing? Obviously, the lease financing is an important part but, also the residual financing. Is that a source of capita you’ve talked about in the past?

Chris A. Choate

I would say that’s something we will look to do particularly if single lay attachment is the future for any bond insurance. Economically, we would look to get some residual financing below that to make our ROEs right. In the near term that may not happen, we’re not planning on that happening but, there are parties out there who might be interested obviously, for a price, to do that.

Carl Drake – SunTrust Robinson Humphrey

Last question; Dan, on this FSA agreement is the enhancement levels something that’s committed from their part? Or, is that a moving target? You mentioned low twenties.

Daniel E. Berce

That is not committed on their part. That is subject to the rating agencies assessment of the credit environment and what is necessary to enhance any given deal to that A- level. It’s just in the current environment, kind of where we are right now, kind of that mid teens up to 20% is kind of our current assessment of what that looks like.

Operator

We’ll go next to Chris Brendler with Stifel Nicolaus.

Chris Brendler – Stifel, Nicolaus & Company

On the credit front obviously, it came in I would think much worse than you were expecting and I guess the struggle that a lot of people are having is what’s driving it? Is it loss of jobs in those formally hot housing states like Florida? Or, is it just unrelated stress from the housing markets crimping concern on finances? When you have collection calls to these people do you have any sense of when you say it’s macro stress, is it job related? Or, something else?

Chris A. Choate

Obviously, there are a number of factors involved but, if you look at a market like Florida, for instance, the state level of unemployment has gone up meaningfully year-over-year. When you get to anecdotal explanations, you’re looking at consumers that even if they are still employed may be working less hours, commissions may have been cut, they may not have a second job anymore. You combine that with stress from higher gas prices, higher food prices, maybe over leveraging period and it all adds up to a consumer that is more stressed now than they were even just six months ago.

Chris Brendler – Stifel, Nicolaus & Company

I guess the struggle I’m having now is we’re already at levels back close to or in excess of 2002 peaks and we really haven’t even seen the follow through in at least the national job numbers and given the commentary and the FED cut today obviously, we’re heading into a weaker economic environment. I mean how much higher can losses go and do you have any sense, is there any temporary factors that are driving the increases that we saw in December other than seasonality?

Chris A. Choate

Cleary, I think as it relates to Long Beach there was this servicing transition which affected us really from August all the way through this month. The overall portfolio, if you’re looking at the trust data, December is typically the peak in terms of seasonal performance. You’re also looking at trust data that hasn’t had an addition since September so, there’s quite a bit of seasoning going on there so when you compare it to December 02, that’s not quite a good comp.

Chris Brendler – Stifel, Nicolaus & Company

I guess along those lines, it sounds like the first half of calendar 08 you’re okay on the subprime triggers but as you go into the latter half of this year you’re triggers could be tripped.

Chris A. Choate

We don’t even anticipate going throughout 08 hitting those triggers. But, you know, it’s all subject to what happens with the macro environment. If it gets substantially worse from here we’ll certainly have to reevaluate.

Chris Brendler – Stifel, Nicolaus & Company

I guess my question is related to liquidity, you have the $200 million conversion, any other debt coming due in December 08?

Chris A. Choate

No.

Chris Brendler – Stifel, Nicolaus & Company

And how comfortable do you feel even if you had some of those 06 and 07 subprime deals start to trip, do you have enough cash for this year?

Chris A. Choate

We do. Again, we built a plan that has a lot of contingency built in for unforeseen events but, we also know that we have to be flexible if things do get dramatically worse that we might have to take another swipe at the operating plan. The key for us is to manage origination volumes. That’s by far our biggest deployment of cash and I don’t want to say it’s simple but, cutting originations preserves liquidity in our model pretty quickly and pretty dramatically.

Chris Brendler – Stifel, Nicolaus & Company

My last question is along those same lines, I would assume that pricing in the competitive environment is improving significantly. I guess, I haven’t really thought about what spread levels would be on your next transaction, even if you had to double the cost of insurance for the two swap has gone down dramatically in the last six months or five months since your last deal. I would imagine your profitability on the margins is going to be a lot higher going forward and is that how you sort of cramp down on origination growth by just keep taking your pricing up so it’s even higher margins?

Chris A. Choate

The origination growth will be accomplished mainly through dealer selection, credit tightening and some market specific consolidations. We’re not looking for pricing to pinch originations down. We will look to increase pricing where we think the market will accept it and I think the competitive environment especially as we entered 08 has taken a real favorable turn.

Chris Brendler – Stifel, Nicolaus & Company

Okay. So, margins a year from now should be higher across your whole portfolio.

Chris A. Choate

That certainly could happen, yes. I mean, it depends on the other side of the equation, the capital markets are obviously in a great degree of turmoil and yes, benchmark rates are down but the spreads we have to pay at this point are a bit of a wildcard because there haven’t been non-prime deals done recently to benchmark off of.

Operator

We’ll go next to Scott Valentin with FBR Capital Markets.

Scott Valentin – Friedman, Billings, Ramsey & Co., Inc.

Thanks for taking my question. Regarding the FSA agreement with them, I guess lining up a commitment but not having the fund, is it dependant on their capital ability? Is that basically what it comes down to?

Daniel E. Berce

No Scott, I don’t think it’s so much based on their capital ability. They just, as they always have, reserve the right to review the credit criteria of the collateral going into the deal, they have some timing constraints that they advise us on, they can’t do the entire capacity right now, they’ve got to spread it throughout the year. So, there’s really nothing particularly unusual about the fact that it has to go through the process on the FSA side to be reviewed and approved. Very normal types of things that don’t have to do with their ability to access capital on their side to support that offer to us.

Scott Valentin – Friedman, Billings, Ramsey & Co., Inc.

I’m sorry to ask the question again, can you review the initial enhancement will be probably what? Mid teens you said?

Chris A. Choate

Mid teens.

Scott Valentin – Friedman, Billings, Ramsey & Co., Inc.

And go somewhere to the low 20s.

Chris A. Choate

Building to around 20.

Scott Valentin – Friedman, Billings, Ramsey & Co., Inc.

Then finally, there’s been some headlines in the news regarding, I guess Leucadia has been the primary newsmaker but, can you talk about any discussions you’ve had with Leucadia regarding their position?

Daniel E. Berce

I can tell you that Leucadia we’ve had a fair amount of discussions with them regarding their position. They, I think, will be big supporters of the company going forward and I think they will act like any institutional investor would.

Operator

We’ll go next to Bob Napoli with Piper Jaffray.

Robert Napoli – Piper Jaffray & Co.

Dan, a question on your charge of guidance; what do you assume in there as far as the trends in the economy and your portfolio? Do you assume do things get worse from what you saw in December? Or, do things kind of stabilize at that level? What kind of thoughts do you have around that? How much room is there in that charge off guidance for things to get worse?

Daniel E. Berce

I’m going to answer it two different ways Bob. In our operating plan we’re absolutely assuming things get a bit worse because, that’s how we’re doing our liquidity planning. With respect to the guidance, we’re extrapolating the trends we saw in December which were poor into the next six months which, you know, is going to cause a pretty big year-over-year increase in charge offs. I mean, it was just last June of 07 that we had charge offs of 3.3%. So, we’re certainly expecting a much higher number for both the March and June quarters than last year and I think that’s reflective again, of extrapolating the December trends.

Robert Napoli – Piper Jaffray & Co.

What have you seen so far in January? As you said, things accelerated to the downside in December and I think we saw that not just in your company but elsewhere, in the credit card area, etcetera. But, what have you seen so far in January? Is that arrow still pointing up? Have you seen the curve at those high levels to start to stabilize? I mean, are you getting more confident in your ability to predict charge offs than you were 30 days ago?

Daniel E. Berce

I’d like to see a whole month first of all because, that’s a complete picture. But, the deterioration that we saw in the last particularly two weeks of December were very unusual and that’s not happening in January. I can’t tell you thinks are snapping back but, that rate of acceleration was pretty isolated and again, very unusual.

Robert Napoli – Piper Jaffray & Co.

Leucadia came across, they own 20 million shares right now your about 18% of your company so, just to make sure I understood your thoughts – I know Leucadia, I’ve know that company for a long time, I know they were in the auto finance business years ago. Have you know them for a long time? And, do you view that purely as an institutional equity investment versus their interest in getting back into this business?

Daniel E. Berce

We’ve known them for some time and they do know the business having, as you pointed out, been in it in one point in time. As I’ve said, we’ve had real good conversations with them about their investment. I think they’re going to be a real supportive shareholder and I think as far as their intentions you’d probably have to ask them.

Robert Napoli – Piper Jaffray & Co.

As far as credit tightening I was hoping to get a little more color on how you did that. And, back in the last cycle I think you did a very good job in the way you went about tightening credit seemed to work out. I just wondered if you could maybe give a little bit more color as far as the portion – I mean, the geographic is one thing, more profitable dealers but, how about on the credit score and LTVs, things like that. Any changes in that?

Daniel E. Berce

Anything we do with score cutoffs is going to be market and even perhaps dealer specific. Obviously, the markets that have performed poorly we’ll be focused on most from a cutoff standpoint. LTVs, we’ve already taken some steps to manage LTV exceptions down. We did that a couple of months ago. When we introduce our new scorecards here soon there will be a greater emphasis on LTV in determining score. So, that is another area that we’ll focus on but, as I said in my prepared remarks Bob, what happen in the December quarter we don’t believe had anything to do with term or LTV. It was very macro in nature.

Robert Napoli – Piper Jaffray & Co.

Are you seeing any change in the used car markets? Any worsening in the used car market so far in January?

Daniel E. Berce

No. It’s not getting better but, it hasn’t taken any meaningful step worse either.

Operator

(Operator Instructions) We’ll go next to Jordan Hymowitz with Philadelphia Financial.

Jordan Hymowitz – Philadelphia Financial

Most of my questions have been answered, I just have one. You had commented in the past on calls that CarMax’s static pulls are doing better than the comparable other used car dealers and CarMax has said on their calls as a result of that when and if people cut back they’re more likely to cut back on other people than CarMax. My question is are you still seeing that relative our performance in CarMax pools? And, as you cut back from $10 billion to $6 billion per say are you likely to cut back [inaudible] or CarMax is a little less profitable for you, could it be more with them? How do you think about that?

Daniel E. Berce

I can’t comment on specific relationships to say that the CarMax business continues to perform from a credit standpoint very acceptably.

Operator

We’ll go next with David Rainey with Akre Capital Management.

David Rainey – Akre Capital Management

I’ve got several questions. Dan, anymore thoughts you could share on January trends on the collection side of the business particularly as it relates to either frequency of contact or, I think your comment earlier that you’re not going to be reducing staffing levels in collections but, in fact are you taking them up?

Daniel E. Berce

We don’t believe we’re understaffed to any extent in collections. As a matter of fact, I think we’ve done really good in terms of contact rates and calling programs. We may staff up a little bit more to maybe do some more night and weekend campaigns. It certainly, in this environment the more collection resources you have, I think the better. I think it’s a real good cost tradeoff. But, again, January – before I even say anything about it I’d like to see a whole month. January is not reflective of what happen in December but, it’s incomplete so far.

David Rainey – Akre Capital Management

Could you talk a little bit more about your unified origination model? When it will be available? What you’re able to do now without it? What you’re not able to do now without it as you try and selectively reduce originations?

Daniel E. Berce

Well, I think what you’re referring to is the new set of score cards that we’re going to put in that will underwrite prime all the way to subprime and implementation will begin in the March quarter of those cards. Right now what we can’t do is certainly the Long Beach business is being underwritten on legacy Long Beach underwriting tools. I’ve talked previously about the lower credit tiers there having been an issue. We’re not doing that business anymore out of Long Beach. But, the advantage will be we’ll just have a consistent view and a much fuller data set to underwrite our entire spectrum with.

David Rainey – Akre Capital Management

So, it’s more of an underwriting engine? Or, more of an origination?

Daniel E. Berce

Its credit underwriting and obviously, there’s a pricing link.

David Rainey – Akre Capital Management

Could you just explain again the agreement you’ve reached on the Long Beach 2006 AB 07 A that have hit the level one triggers? You’ll be using cash did you say from outside the deals to bring to build the retained levels higher?

Daniel E. Berce

That is essentially correct. We’ll be using cash not only that’s inside those three Long Beach deals but also that is generated by our other FSA AMCAR deals will essentially go over to enhance those Long Beach deals by the 5% additional requirement that I mentioned.

David Rainey – Akre Capital Management

Okay. So, Long Beach 06 A&B and 07 A are all FSA deals?

Daniel E. Berce

Correct.

David Rainey – Akre Capital Management

So, is this tied to FSA’s offer of capacity?

Daniel E. Berce

Yes, it is.

David Rainey – Akre Capital Management

So, you all anticipate that it will take five to six months?

Daniel E. Berce

Four to six months and around $40 to $50 million in order to get that higher enhancement level reached.

David Rainey – Akre Capital Management

Okay. Now, your December securitization data showed cash for lease of $33 million, if my memory serves me correct. The prior month it was $50 odd million.

Daniel E. Berce

But, that’s not all FSA.

David Rainey – Akre Capital Management

Okay. That’s FSA and lots of others?

Daniel E. Berce

All the other bond insurers that we have deals outstanding with.

David Rainey – Akre Capital Management

Okay. So, you all will focus all of the other FSA deals to help support these three?

Daniel E. Berce

That’s how we get the $40 to $50 million and the four to six months. It will be the FSA component of the overall distributions that will move sideways for a period of time to support those Long Beach deals that hit the level one trigger.

David Rainey – Akre Capital Management

These are the securitizations that have a disproportionate share of the lower rated Long Beach originations?

Daniel E. Berce

They are exclusively Long Beach originations. Deals done prior to the acquisition of Long Beach in 2006 and the first deal that Long Beach did after we acquired the platform in early calendar 2007. So, they are all Long Beach collateral.

Chris A. Choate

And there would be a proportion of those lower tiered loans in each of those deals.

David Rainey – Akre Capital Management

Can you comment on the bad rates that you’re seeing across the portfolio now? In your investor presentations you aggregate a number of delinquencies.

Chris A. Choate

I don’t know if I understand your question. The credit results, the miss if you will in the December quarter was largely frequency driven. So, our bad rates have escalated.

David Rainey – Akre Capital Management

You all had made the argument in previous calls that the bankruptcy affect and the timing and then ultimately the severity of the bankruptcy versus non-bankruptcy would work itself out. But, that the bad rate between the 06 and early 07 originations were beginning to approximate the 05. Are you less [inaudible] about that.

Chris A. Choate

The quarterly performance this quarter affected all vintages. Now, obviously there’s more 06 and 07 outstanding and 05 is more seasoned but, it affected all vintages, the higher frequency this quarter. But again, because those are less seasoned they will show ultimately higher bad rates than 05.

David Rainey – Akre Capital Management

I guess I saw after the release before the call started that Leucadia filed a 13D today. Is that right?

Chris A. Choate

I didn’t see it.

David Rainey – Akre Capital Management

There was a question about intentions and I think whoever asked that might want to look at the 13D filing.

Operator

Our next question is a follow up from John Hecht with JMP Securities.

John Hecht – JMP Securities, LLC

I’m just trying to understand the dynamics of the near term quarters in terms of your forecasting. I guess some of this is a little bit of follow up from Bob Napoli’s questions. Over the past few years your delinquency buckets have improved by between 170 and I think about 210 or 220 basis points in the first three months of the year and then that rolls into improving annualized charge off rates into the middle of the year. What can you tell us in terms of your expectations for recovery rates and then seasonality in terms of credit? Do you expect those to improve like a normal year? Or, is a portion of it a normal year? Is there anything you can guide us to on that?

Daniel E. Berce

Sure. As far as frequency or even delinquencies we clearly expect to see favorable seasonal trends between now and spring time. We enter the year however, with fairly high, at least compared to last year, 60 day delinquencies which will have to be flushed trough the faults if you will which will cause March charge offs to be higher than what they had been in the past and I think they’ll be a bit less than what we saw in December but, they’ll be elevated. The benefit of seasonality will really, from a charge off standpoint, will be more in the June quarter when we come off lower delinquency levels on March 31. From a severity perspective we’re looking for slightly lower used car prices throughout the next six months on a seasonally unadjusted basis which should tell you that perhaps unseasonally adjusted there may be better months ahead. February, March, April tend to be better used car markets.

Operator

Due to time restraints we are unable to take any additional questions at this time. I will now turn the call over to Caitlin DeYoung for closing remarks.

Caitlin DeYoung

This concludes AmeriCredit’s second quarter fiscal year 2008 earnings conference call. If you have any additional questions please contact me or anyone in the investor relations department. Thanks to everyone for participating in the call and for your continued support of AmeriCredit.

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