Executives
Caitlin DeYoung – Vice President, Investor Relations
Daniel E. Berce - President and Chief Executive Officer
Chris A. Choate - Chief Financial Officer and Treasurer
Analysts
Sameer Gokhale - Keefe, Bruyette & Woods
John Hecht - JMP Securities
Christopher Brendler - Stifel Nicolaus
Michael Cohen – Sonova Capital
Scott Valentin - Friedman, Billings, Ramsey & Co.
Jordan Heimowitz - Philadelphia Financial
Scott Valentin – Friedman, Billings, Ramsey & Co.
Robert Napoli - Piper Jaffray
David Raney – AKRE Capital
Jordan Heimowitz - Philadelphia Financial
AmeriCredit Corp. (ACF) F4Q08 Earnings Call August 6, 2008 5:30 PM ET
Operator
Welcome everyone to the AmeriCredit fourth quarter fiscal year 2008 earnings conference call. (Operator Instructions) I will now turn the call over to Caitlin DeYoung, Vice President Investor Relations.
Caitlin DeYoung
With me today for the prepared remarks are Dan Berce, President and CEO and Chris Choate, Chief Financial Officer. Also joining us are Steven Bowman, Chief Credit and Risk Officer and Co-Chief Operating Officers, Mark Floyd and Preston Miller.
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 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 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 the quarter, we recorded a loss of $150.0 million, or $1.30 per share. Included in these results was a $213.0 million pre-tax, non-cash impairment of the goodwill created in our acquisitions of Bay View and Long Beach in 2006 and early 2007 respectively, and an $11.0 million pre-tax restructuring charge.
Excluding these charges, we earned $13.0 million pre-tax, which included a significant increase in loan loss provisions to build our allowance for loan losses.
In our prepared remarks today, I will cover our portfolio credit performance for the June quarter and our outlook for future credit performance. I will also discuss additional changes we have made to our operating strategy, including trends we are seeing with loan originations. Chris will then provide you with an update on funding, liquidity, and the capital markets.
Now, starting with credit: For the June quarter, credit results followed normal seasonal trends with a modest improvement in credit losses and increasing delinquencies. Annualized net credit losses were 5.9% for the June quarter, compared to 6.6% for the March quarter and 3.3% a year ago.
31 to 60 day delinquencies were 6.0% at June 30, 2008, compared to 5.3% at March 31, and 4.7% last year. Accounts greater than 60 days delinquent were 2.9% at the end of the quarter compared to 2.3% at March 31, 2008, and 2.1% last year.
Our recovery rate on repossessed collateral was 43.6% in the June quarter, compared to 43.9% in the March quarter. Despite the significant year-over-year decline in the value of large SUVs and pickup trucks, we have experienced relatively stable recovery rates for the last several quarters due to a greater concentration of compact and more fuel efficient vehicles in our portfolio, which have actually increased in value year-over-year.
Also, we have not seen anything in our portfolio metrics to suggest that frequency of default is correlated with vehicle fuel efficiency. We expect recovery rates to remain in the low 40% range, subject to the normal seasonal strengths and weaknesses.
Although difficult to measure, we believe we experienced some benefit to payment rates due to the stimulus funds distributed to consumers during the June quarter. Looking at future credit performance, we expect the macro economy to stay weak as higher unemployment and rising gas prices strain household budgets and apply additional pressure on portfolio credit performance as we go into the normally weaker credit season in the second half of the calendar year.
We now expect net losses to fluctuate in the mid-6% to upper-7% range, which is slightly worse than our expectations as of the end of our March quarter. As a reminder, our credit metrics going forward will reflect upward pressure due to the denominator effect of a declining portfolio balance. This will likely impact our net credit loss rate in fiscal 2009 by more than 100 basis points when compared to a portfolio size that’s stable.
During the June quarter, we purchased $780.0 million of new originations, which as planned, is a significant reduction in volume compared to $1.3 billion for the March quarter.
Consumer demand for new and used vehicle purchases has softened considerably over the past several months. This softening demand, combined with the pullback by most of our major competitors, has allowed us to maintain a strong market presence with auto dealers even as we have decreased our originations volume by two-thirds from last year.
Given the weakened consumer demand for automobiles, which translates to less credit applications and financing opportunities, we currently expect our annualized origination volume to be somewhat less than a $3 billion run rate.
A substantial portion of our loan volume reductions have been achieved through implementing tighter credit guidelines with higher loan pricing. Since January 2008, the average custom score of the sub-prime loans we’ve originated has increased over 10 points and loan-to-wholesale value decreased over 10% to approximately 110%. At the same time, we have been able to raise the rate and net fees we charge on those loans.
While still early, the tighter credit guidelines we implemented have resulted in significant improvement in credit performance in the 2008 origination vintage, compared to the 2006 and 2007 vintages. We will continue to evaluate credit on a regional basis, balancing credit standards and market performance, and increasing pricing in markets where competitive dynamics will support them.
We have also been evaluating the profitability and capital intensity of all our lending products and channels. As a result of this process, we have discontinued originations in Canada and ceased leasing and direct lending activities. We have also suspended production on our prime platform and significantly pulled back near-prime originations to focus on our traditional sub-prime core.
Our decision to limit prime and near-prime credit offerings was based on our inability to generate adequate profitability from these products given the higher funding costs and capital requirements of the current environment. With our constrained volume objectives, we are focusing on originating those loans that provide the highest possible returns.
With respect to our operating structure, we closed or consolidated 21 loan origination offices during the June quarter. Appropriate reductions have also been made in the overhead and support areas of our company. Staffing reductions have not been made in our collections infrastructure and we remain fully staffed to service our loan portfolio through a challenging environment.
We now operate 24 loan origination offices in major markets fully staffed to service our dealer customers all hours they are open to sell cars. Our sales organization still provides national coverage in support of our loan origination offices. In aligning our organizational structure to our revised originations and portfolio targets, we have been careful to preserve the core strength of our business model and protect the future value of our franchise.
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 June quarter, we recorded a net loss of $150.0 million, or $1.30 per share. $213.0 million pre-tax of this loss relates to a non-cash charge for goodwill impairment. We are required on an annual basis to perform a goodwill impairment assessment, which requires, among other things, a reconciliation of current equity market capitalization to shareholders equity. At recent stock price levels, our total shareholders equity significantly exceeds our equity market capitalization, indicating goodwill impairment.
In addition, we recorded an $11.0 million pre-tax restructuring charge for changes to our operating structure which Dan just discussed. Excluding the impairment to goodwill and the restructuring charge, we earned $13.0 million pre-tax during the quarter. We also recorded a $14.0 million non-cash tax expense on foreign currency gains resulting from the decision to repatriate certain cash invested in our now discontinued Canadian lending operation.
We recorded a provision for loan losses of $279.0 million, or 7.2% of average receivables for the June quarter. The allowance for loan losses increased to 6.3% at June 30, 2008, from 5.7% at March 31, 2008. The overall economic environment has continued to deteriorate as evidenced by weaker labor markets, rising cost of goods, particularly fuel and food prices, and ongoing declines in home values. Given this deterioration and the impact that it could have on sub-prime consumers, we increased our allowance for loan losses.
Excluding restructuring charges and leased vehicles depreciation, operating expenses for the quarter were 2.3% of average managed receivables. We are committed to maintaining an operating expense ratio in the mid-2% range even with our managed portfolio scheduled to decline to below $12.0 billion by the end of fiscal year 2009 at current loan origination run rates.
Now turning to funding and the capital markets: In May, we executed our $750.0 million 2008-A-F AMCAR securitization. This sub-prime transaction, which was insured by FSA, had a weighted average coupon of 6% compared to 5.5% on our last AMCAR securitization in September 2007. Initial credit enhancement was 20.5% compared to 9% on our September transaction. And target credit enhancement increased to 24.5% from 13% on our September transaction.
The ABS markets showed notable improvement leading up to our execution of this deal and we were in a position to take advantage of market conditions. Furthermore, we were able to clear all the bonds in the market and did not have to utilize our forward purchase commitment with Deutsche Bank.
Needless to say, the capital markets have taken a step back since May. Shortly after our successful May securitization, we began to focus our efforts on using senior subordinated structures for future securitizations as concerns around FSA’s financial condition began to surface.
Earlier today, FSA announced that they will no longer insure asset-back securities. This announcement was not a surprise to us. FSA-insured deals had not only become less attractive to investors, they were also ineligible under our Deutsche Bank agreement based on FSA’s credit default swap levels and the negative watch on their credit rating.
Although we have historically favored issuing bond-insured asset backed securities, we have issued over $4.0 billion of senior subordinated securities on our AMCAR and APART securitization platforms in the past. As a reminder, the AAA notes in a senior subordinated structure are eligible for purchase in accordance with our Deutsche Bank agreement.
Credit enhancement requirements in a senior subordinated structure will be somewhat higher than in the wrapped transaction we executed in May. Specifically, we expect that initial credit enhancement below the A level in a senior-subordinated deal will be in the mid-20% range, building to a target enhancement in the low-30% range. We anticipate selling the AA/A notes, which would comprise approximately 25% of the total notes issued, as well as the remaining 75% of notes rated AAA, to investors.
We are currently assessing market appetite for the subordinated notes, and may consider securing a forward-purchase commitment to provide certainty of funding for these classes over several transactions. Overall, we expect all-in pricing in a senior-subordinated deal to be higher compared to our last wrapped transaction due to the higher pricing on the subordinated notes. However, creating capacity on our warehouse lines to support future originations is a top priority for us at this time.
As of the end of the quarter, we had $5.0 billion of total warehouse capacity under five different facilities. Our $500.0 million repurchase facility will not be renewed this month. Under the terms of the repurchase facility, receivables pledged on the line will amortize down until the facility pays off. In the future, we will fund receivables purchased after the clean up call date by pledging them to one of our other warehouse facilities and ultimately resecuritizing them.
Additionally, we are in discussions with our lenders to renew our prime-near-prime warehouse facility at slightly less than half its current size, or $400.0 million-$500.0 million. Since we have pulled back significantly on our prime and near-prime originations and are focusing on sub-prime originations, we will be relying on our $3.25 billion of sub-prime warehouse lines to support loan volumes.
As of July 31st, we had available capacity to fund $1.4 billion of sub-prime originations. This is enough capacity at our current run rate to fund originations through fiscal year 2009 provided we have modest access to the securitization markets. We are optimistic we can execute a senior-subordinated securitization in the September quarter and access the markets opportunistically throughout fiscal 2009.
A few final notes regarding funding before we move on. Our $150.0 million Canadian warehouse facility matured in May and was not renewed. The outstanding balance on this facility will amortize down over the next year and will be paid in full next May.
Also, subsequent to quarter end, we closed a new $100.0 million lease warehouse facility. We expect to have this facility, which is a 364 day line of credit, fully borrowed by the end of the September quarter.
Finally, we are in compliance with all warehouse covenants as of June 30, 2008.
Now, turning to liquidity: At June 30, 2008, we had $433.0 million of unrestricted cash, down from $484.0 million at March 31, 2008. Taking into consideration our results from the June quarter and our new leasing facility, we are on track to achieve an unrestricted cash balance in the range of $300.0 million-$400.0 million throughout fiscal year 2009, even after retiring the $200.0 million in convertible notes in November.
The senior-subordinated structure we anticipate utilizing for future securitizations delays the timing of cash distributions to us as higher enhancement levels are built, which will cause cash balances to remain relatively flat throughout fiscal year 2009.
We have two or three securitization trusts that could potentially hit performance triggers this year, particularly if economic conditions continue to weaken and losses exceed our current forecasts. However, even in a more stressed economic and portfolio performance scenario, we are comfortable we will maintain cash balances in the $300.0 million-$400.0 million range.
Finally, a few statistics. Shareholders equity at quarter end totaled $1.897 billion. Book value, all of which is now tangible, was $16.31 per share at June 30, 2008. Managed assets to equity decreased to 7.9x at June 30, 2008, compared to 8.0x at March 31, 2008.
Leverage will continue to decrease throughout fiscal 2009, as our portfolio balance declines and we put higher levels of capital into our financing structures.
I will now turn the call over to Dan for some closing remarks.
Daniel E. Berce
As you can tell from our prepared remarks, the primary issues facing our business are portfolio performance in a challenging economic environment, maintaining liquidity and warehouse borrowing capacity, and accessing the capital markets for securitization transactions.
We have taken proactive steps to position the business to withstand weak economic conditions, such as raising cut-off scores, lowering loan-to-value ratios and selectively increasing rates and fees.
We have also been aggressive in protecting liquidity by lowering origination levels by two-thirds, exiting loan products and markets that were not core to our long-term franchise, and reducing expenses. These are things that we can control, and our management team and employees have done an outstanding job of making difficult but necessary decisions, and being nimble and flexible, as we position the business for ongoing economic challenges.
We have also been proactive and vigilant in monitoring and preparing for opportunities, however small or brief they may be, in the credit and capital markets. However, we are less in control of conditions in the capital markets.
Our securitization in May resulted from months of preparation and creative deal-making to be ready to seize upon a brief window of liquidity, including entering into the back-stop agreement with Deutsche Bank, working with FSA to have insurance capacity, and outreach to dozens of ABS investors.
The environment we operate in continues to change rapidly and we will continue to be proactive in transitioning our operating strategy accordingly. We are confident in the viability of our business model. We provide a valuable service to our dealer customers and the marketplace. Our primary goal as we manage through this challenging environment is to protect the value of our platform and position the franchise to provide shareholder value well into the future.
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.
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 Sameer Gokhale with Keefe, Bruyette & Woods.
Sameer Gokhale - Keefe, Bruyette & Woods
First, the question was, when I look at the press release and I just sort of adjust the loss of about 30 and adjust for some of these goodwill impairment charges and some of other things, it looks like the number come out to a loss of $0.07 and yet I think the release says that you earned $13.0 million pre-tax. Maybe my math is wrong or is there something with the tax provision that is causing there to be a loss?
Daniel E. Berce
As Chris mentioned in his remarks, we took a $14.0 million tax charge related to repatriating some cash from Canada when we closed our Canadian lending operations. That really didn’t have any income attached to it, it was just an outright charge that the translation gains we’ve accumulated up there have never been tax effected and when we repatriated some cash we had to tax effect them.
Sameer Gokhale - Keefe, Bruyette & Woods
The other question I had was you talked about the originations maybe being a little bit lower than the $3.0 billion run rate that you had previously guided to. How much lower do you think that would be so that you end the calendar year with the $300.0 million-$400.0 million? Relative to say the $750.0 million quality run rate that we talked about, originations going to the $600.0 million range or $500.0 million or maybe much less than that.
Daniel E. Berce
It’s hard to articulate exactly where it’s going to end up. We’re certainly not pushing originations, we’ve tightened credit, we’re raising pricing, and if we originated $200.0 million a month we’d be just fine with that. If it’s $250.0 million a month we would probably be fine with that as well. The point was, we had articulated $3.0 billion before but that’s not a hard number that we’re really trying to get no matter what.
Sameer Gokhale - Keefe, Bruyette & Woods
I know at one point you were concerned, or you mentioned, that you really prefer not to reduce the originations below say a run rate of $750.0 million a quarter because of the potential damage to franchise value. But it seems like the auto dealers will take a loan for their customers any way they can get it so you can afford to maybe cut your originations very significantly and not really affect your franchise value longer term. And boost your liquidity position as well. Is that the way you are thinking about it?
Daniel E. Berce
That’s absolutely the way we’re thinking about it. Car sales, whether new or used, are down significantly from just six months ago. Many, many of our major competitors have scaled back, in some cases as much as us, in some cases they’ve closed their shop completely, so we believe we’re as relevant to the dealer today as we were six months ago, even though we’ve cut back our volume quite a bit.
Operator
Your next question comes from John Hecht with JMP Securities.
John Hecht - JMP Securities
Chris, you spoke as if you had been in the middle of some detailed discussions with potential buyers of the senior sub-deal. First, you mentioned I think 75 senior 25% subordination. Now, is that down to the single A point and how much capital would AmeriCredit need in that type of transaction? I just want to make sure I have my numbers right.
And second, what are the types of buyers you’re talking to for the subordinated piece?
Chris A. Choate
That is down as a single A, the 75 and 25 would be down to a single A. And I would say a $500.0 million transaction. That would mean then that there are roughly $120.0 million-$125.0 million in AA/A bonds that we would be looking to place. That is above the enhancement that we would need to put in the deal, which as I mentioned would be kind of mid-20s initially, building up to low-30s. So that would be on top of the $500.0 million, if you will, as far as reserve and OC.
Dan actually was on the road of late visiting with some investors. They were largely people who could perhaps participate in a one-deal type transaction to help us get one deal executed, buy some portion of that $120.0 million-$125.0 million in AA and A type of bonds we need to get sold.
And as I also mentioned, we would certainly evaluate putting in some type of secured-for-purchase commitment facility and that would include having discussions with some of our bankers and some other larger private equity type funds that would be able to bring that type of capital to the table.
John Hecht - JMP Securities
Are you guys done with the prior triggers and you had to engage in some, in a sense, some retroactive cross-collateralization. Is that all taken care of?
Chris A. Choate
Yes, it is. That was concluded in our MBIA transaction as of our May distribution date. And same with the FSA, it was in the May distribution date.
John Hecht - JMP Securities
Can you give us a sense for how your roll rates are looking from the early stage to late stage delinquencies? Is there anything unique you’re seeing there? Maybe can you highlight which trusts you’re watching more closely as potential triggers? And then finally, I think historically you put your July credit results up on this call. Are you going to do that or should we just wait until August for that?
Daniel E. Berce
It’s going to be up on Monday. The question about roll rates, we’re seeing softer roll rates, certainly year-over-year. But not any trends that are alarming. The month of July came in kind of where we thought it would so things seem to be holding together. You know, the wild card is our credit seasonally gets weaker from here on through the end of the year and with economic conditions where they’re at, we certainly are cautious regarding credit.
You asked about trusts, kind of the late 2007 pools would be the ones we would be watching the closest in terms of potential triggers. And it would be the default rate that would be the most at risk.
Operator
Your next question comes from Chris Brendler with Stifel Nicolaus.
Christopher Brendler - Stifel Nicolaus
Can you give us like on the liquidity plan of the $300.0 million-$400.0 million, where are the pressure points around that plan? It’s not exactly a robust level of cash, given what you’re experiencing. I’m surprised it’s actually that high given the enhancement levels you are talking about in a senior sub transaction. What are the pressure points, where are you most concerned? Is it the ability to get securitization off at the pricing you’ve talked about, is it cash tracking in the trust or anything else, or is it the triggers on these sort of warehouse agreements? Where is your comfort level on liquidity right now and what are you most concerned about?
And HSBC seems to be shutting down its auto-finance business. You mentioned others. Is that a funding decision given how bad you securitization markets are or is it just from a credit perspective it’s too dicey out there, the parent didn’t want the risk. And how do you feel about your business affiliates’ continue to renew loans and how close are you to deciding to shut the doors if things continue to get worse?
Daniel E. Berce
Chris, I’ll answer the latter question first and then let Chris talk about the pressure points and liquidity.
With respect to HSBC and Triad Financial, who also closed their doors, I mean, I can’t speak for why they made those decisions. As we see the business, obviously the capital environment is very stressed and the business is more capital-intensive and cost of funds is higher certainly than what we would like to see going forward.
With capacity leaving the business, we think there is good opportunity to make profitable loans with higher pricing and better, tighter credit. But certainly I think the underlying profitability, our way, if you will, the business fundamentals are really quite good. It’s just a matter of whether you can get the ROE at this point with the capital intensity.
You know, our goal is to get our funding in place, as Chris said, with perhaps a AA/A back-stop so that we would have 12 months or 18 months to really hunker down and see what develops in our business.
Chris A. Choate
And on the liquidity question, actually we think $300.0 million-$400.0 million generally is a very acceptable range. We’re very comfortable with that. We think it’s robust, to use your word, to run the business.
Looking out over the next several quarters, we have a significant amount of amortization in the portfolio that’s going to kick off 17% to 20% or so in credit enhancements back to us. And as Dan talked, the $3.0 billion origination run rate is not hard and fast. We may be a little bit under that. So we expect to pick up a fair amount of source of cash off that amortization.
We also put in place, subsequent to quarter end, a new leasing facility that gives us access, really, to a sort of a supplemental $100.0 million liquidity. And so combining those two factors, and even with some stress in some of the late 2007 loan pools that Dan mentioned in a prior question, we feel very comfortable. We retire the converts in November and kind of continue on in sort of the $300.0 million-$400.0 million range, really through out the year.
Daniel E. Berce
Over the next 12 months our portfolio is going to liquidate $3.0 billion plus. And that principal liquidation, as Chris said, has 15% to 20% capital free-up tied to it, so there’s not really much of a pressure point or variability around that. That’s just flat going to happen. And whether we have a little bit of trapping, the cash, we feel very secure it’s going to stay in that $300.0 million-$400.0 million range.
You commented about the enhancement requirements in the senior sub. We had already positioned our business, if we were doing wrap deals, to have the wrappers attach at A anyway, so the initial enhancement in senior sub deals isn’t much different that what we had already baked into our planning for liquidity purposes.
Operator
Your next question comes from Michael Cohen with Sonova Capital.
Michael Cohen – Sonova Capital
Would you anticipate in any kind of forward-flow agreement that there might be some type of warrant exchange. You mentioned private equity, is there some sort of equity consideration that would likely be transferred to be able to secure subordinated funding?
Daniel E. Berce
We’re not sure what it would look like at this point because we’re really talking to a number of parties now.
Operator
Your next question comes from Scott Valentin with FBR Capital Markets.
Scott Valentin - Friedman, Billings, Ramsey & Co.
This is Chris Camatoni for Scott. Have you seen any difference in the pay-down rate of the receivables and is that factored into your pay-down assumptions, given the inability to trade in cars at this point?
Daniel E. Berce
Sure, the voluntary prepayments have slowed and our models are very up-to-date because we’re seeing the trends every day.
Scott Valentin - Friedman, Billings, Ramsey & Co.
And what is the advance rate on the $100.0 million lease facility?
Chris A. Choate
It’s around 60% or so.
Operator
Your next question comes from Jordan Heimowitz with Philadelphia Financial.
Jordan Heimowitz - Philadelphia Financial
You said there’s about a $3.0 billion in principal run off over the next 12 months?
Daniel E. Berce
$3.0 billion plus.
Jordan Heimowitz - Philadelphia Financial
And you get 15% to 17% credit enhancement.
Daniel E. Berce
%15% to 20% when as every dollar of principal is released.
Jordan Heimowitz - Philadelphia Financial
So that’s like $450.0 million-$500.0 million?
Daniel E. Berce
Yes, whatever the math is.
Jordan Heimowitz - Philadelphia Financial
And that basically means if you have that run off and you have the $200.0 million that has to be paid back, I’m confused why you would have to originate less than $3.0 billion, unless it’s by choice or some other reason.
Daniel E. Berce
The difference between originating $3.0 billion and $2.5 billion isn’t material to our liquidity forecast. I think we had articulated $3.0 billion before and with car sales where they’re at and people not buying new or used cars and budgets constrained, we are just not going to push to try to target any number like $3.0 billion. As I said, if it drifts down to $200.0 million a month, that’s just fine.
Jordan Heimowitz - Philadelphia Financial
But it’s not a liquidity-driven thing that would drive it down. It would be you’re going to fund whatever you can fund.
Daniel E. Berce
That’s right for the most part. Now, we obviously aren’t in any position to grow at this point in time and look to do $3.0 billion plus.
Jordan Heimowitz - Philadelphia Financial
You could fund up to $3.0 billion with today’s liquidity and maintain . . .
Daniel E. Berce
Yes.
Jordan Heimowitz - Philadelphia Financial
And second question is, you said your charge-offs are going to grow 1% approximately just from the run off. So if your charge-offs are about 6% now and you’re targeting mid-6% to upper-7%, so let’s just say approximately 7% is the mid-point, you are saying your charge-offs in 2008, or calendar year 2009, could be about 8%?
Daniel E. Berce
No. The portfolio run off, the denominator effect was incorporated into the range we gave. It was already incorporated in the mid-6% to upper-7%.
Jordan Heimowitz - Philadelphia Financial
So the mid-6% to upper-7% includes.
Daniel E. Berce
Includes roughly perhaps 100 basis points of denominator effect.
Jordan Heimowitz - Philadelphia Financial
And that guidance is good for this upcoming fiscal year?
Daniel E. Berce
Yes.
Operator
Your next question comes from Scott Valentin with FBR Capital Markets.
Scott Valentin – Friedman, Billings, Ramsey & Co.
A question regarding the Deutsche Bank agreement. I understand that you mentioned the FSA issue. But isn’t there also a debt service coverage ratio that’s included in the agreement, and if so how does this quarter’s results impact that?
Chris A. Choate
Within the Deutsche Bank commitment, if that basically tracks the covenant package we have within our master warehouse line, which does have an EBITDA coverage ratio and this quarters results, we’re in compliance with all those covenants. It doesn’t impact it negatively.
Scott Valentin – Friedman, Billings, Ramsey & Co.
And as a contingency plan, as you mentioned the ABS market is right now kind of schizophrenic, I guess for a lack of a better word, are there any contingency plans for maybe if the market does not accept lower rate traunches, would you just go AAA?
Daniel E. Berce
We could certainly do that but with our liquidity planning, that’s not something we could sustain over a 12-month period. Now.
Scott Valentin – Friedman, Billings, Ramsey & Co.
Are you selling loans for cash, is that feasible, to generate liquidity.
Daniel E. Berce
No, there’s really not a good enough bid for auto paper right now.
Operator
Your next question comes from Bob Napoli with Piper Jaffray.
Robert Napoli - Piper Jaffray
Dan, with that charge-off forecast I am assuming that you expect to remain reasonably profitable each quarter, based upon the outlook you currently have.
Daniel E. Berce
I’m not going to focus on the each quarter aspect of your question, but over the course of fiscal 2009, yes we should be profitable. I mean, provisions can be lumpy. Obviously this quarter we had a goodwill write off which drove it into a loss position. But over the course of 2009, even with the upper end of that loss range, we should be profitable.
Robert Napoli - Piper Jaffray
Now with recovery rates, I want to make sure I heard that correctly. I think you said that you would be able to remain in the low 40’s, is your outlook for recovery rates, even as we go into a seasonally softer period?
Daniel E. Berce
We said that it would be in the low 40%s subject to seasonal strengths and weaknesses. So if it printed at 39% in December and at 45% in June or March, that would be consistent with our outlook.
Robert Napoli - Piper Jaffray
What percentage of your cars, I think it’s around 10% or something, or SUVs.
Daniel E. Berce
If 15% to 20% would kind of be the SUV and pickup categories that are most under attack right now.
Robert Napoli - Piper Jaffray
I understand right now we’re in the worst credit crunch probably of the history of AmeriCredit, and going back to 1990 or so, but the long-term funding strategy for your company has got to be something you think about as you’re working very hard on the near-term challenges. What are you thoughts? It’s hard to think that you can want to sustain a business that has to rely on securitization as much as this business does in a market that can be so fickle. It just seems pretty much a stretch to think that sub-prime auto can get bank deposit funding. But I don’t know what your thoughts are on your long-term strategy for the funding markets, or if at this point, you know, that’s next year’s problem.
Daniel E. Berce
Certainly we think about it all the time and discuss it with our Board and advisors. But at this point our goal, as I said, is to get some certainty of funding in place for the next 12-18 months, which I think we will do and we have a good track on. And if we buy that time, over the course of that 12-18 month period, we can assess our options.
Certainly a year ago or 15 months ago I don’t think anybody ever thought the capital markets would be in the condition they’re in today. So anything can happen in another 15 months. I guess better or worse.
Robert Napoli - Piper Jaffray
The Deutsche Bank deal, you haven’t really used the Deutsche Bank funding, you’ve given them the shares as compensation for having it available, but how would that work into a senior sub deal?
Daniel E. Berce
Again, as Chris said, the Deutsche Bank commitment is fully useable or eligible under a senior sub structure. So that essentially gives us certainty of execution for up to $2.0 billion of AAA securities. If we did that we have some $600.0 million of AA/A we would have to find a home for. That’s kind of the hole in the certainty of funding platform now. We think we’ve got the liquidity in good shape and warehouse funding is in decent shape. We’ve got the AAA commitment. That’s the hole, the AA/A.
Robert Napoli - Piper Jaffray
Just over the last couple of weeks you’ve seen a few these major manufacturers get out of the leasing business. You’ve seen HSBC, a pretty big sub-prime lender get out of the sub-prime lending business. Is that additional lack of funding in the market, are you concerned it’s going to put additional pressure on car values?
Daniel E. Berce
Not necessarily. The fact that car sales are down is actually, in my belief, a net positive for car values going forward. I mean absent the whole gas price issue for SUVs and pickups. One of the biggest inputs into used car supply is trade-ins on new car sale and if new car sales are down that’s just less supply of used cars entering the market. And the retirement factor of used cars hasn’t changed. So I don’t thing weak car sales is a bad thing at all for car values.
Robert Napoli - Piper Jaffray
And competitively, with additional pull back, have the terms become even more favorable to lenders that are in the sub-prime market?
Daniel E. Berce
Gradually that is the case, yes.
Robert Napoli - Piper Jaffray
Do you have any idea what your static pool, the loans you’re putting on today, the static pool credit losses, what you would expect them to be? Do we expect these to look like the loans you put on in 2003 and 2004?
Daniel E. Berce
The character of those loans, the profile of those loans, with say 2003, 2004, the economic environment would say 2005. So it really kind of depends on what happens economically.
Operator
Your next question comes from David Raney with AKRE Capital.
David Raney – AKRE Capital
If one or two of the late 2007 vintage yields hit the fall triggers, would that impact your ability to access the sub-prime line of credit at all?
Daniel E. Berce
No.
David Raney – AKRE Capital
And, Dan, when you talk about the Deutsche Bank facility matures at the end of 2009?
Daniel E. Berce
The credit facility or the AAA-backed stuff?
David Raney – AKRE Capital
The AAA-backed.
Daniel E. Berce
That’s April 2009.
David Raney – AKRE Capital
And the revolve, or the line of credit, is September 2009.
Daniel E. Berce
October.
David Raney – AKRE Capital
Have you all begun to look at modifying that at all in order to extend it through 2009 yet?
Chris A. Choate
No, we have not. On either account. On the warehouse line, that’s something we likely would not engage in discussion on until probably the springtime of 2009. And on the back-stop, or the forward purchase commitment, our goal right now is to take maximum advantage of that by the time April rolls around.
David Raney – AKRE Capital
And is it likely that just private equity or hedge funds would be interested in being part of the AA/A back-stop, or are you necessarily marketing that toward a certain group of investors because of either credit or capital?
Daniel E. Berce
We are discussing it with a whole number of parties and different types of entities. The one thing I would say is if we flat out tried to market AA/A publicly in the open market tomorrow, it probably wouldn’t execute. So that’s why we’re talking to maybe you might call non-traditional ABS investors.
Operator
Your next question is a follow up from Jordan Heimowitz with Philadelphia Financial.
Jordan Heimowitz - Philadelphia Financial
I just want to understand something. If you try to market a sub deal that’s about $125.0 million in size and you’ve got to pay like [inaudible] interest on it, don’t you have enough cash to do it either now, would you slow originations more? Wouldn’t that make more sense. I’m kind of confused why you either have the cash or even need that extra $500.0 million of liquidity so to speak, when I look at the balance sheet.
Daniel E. Berce
I don’t understand. You broke up. Can you try it again?
Jordan Heimowitz - Philadelphia Financial
Sure. You’re trying to market a $500.0 million senior sub deal, right?
Daniel E. Berce
Of which $375.0 million, roughly 75%, we have certainty of execution on.
Jordan Heimowitz - Philadelphia Financial
Right. So it’s $125.0 million left. I guess it’s a two-part question. A) Don’t you have the $125.0 million yourself to buy when I look at your balance sheet?
Daniel E. Berce
The answer is yes. But first of all we have to put in the enhancement under that $500.0 million, which we can do and we’re planning to do no matter what. But if you do the math and we do $325.0 million, that’s $375.0 million and that’s about what our liquidity is today. So yeah, we could do it once. And twice, maybe. Definitely not three times.
Jordan Heimowitz - Philadelphia Financial
But why do you need the extra $500.0 million? I guess the other question is, because if your portfolio is going to run off $3.5 billion and you’re not going to fund $3.5 billion, why do you even need the $500.0 million?
Daniel E. Berce
Well, we have $3.0 billion of unsecuritized loans today. And we’re producing whatever the number is, $200.0 million-$250.0 million a month. We have a need to clear our warehouse lines. Yeah, as last resort we can take that run rate down to $100.0 million if we want, or $50.0 million, or zero.
Jordan Heimowitz - Philadelphia Financial
But your warehouse line is basically utilized at this point, is what you’re saying?
Daniel E. Berce
It will be. We mentioned we have $1.4 billion of capacity on it, so that’s what, half a year. Half a year and we can’t make any loans, unless we securitize.
Operator
Due to time constraints 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 Fiscal Year 2008 Earnings Conference Call. If you have 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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