Automaker GM Rebuilding Credit, Preparing for IPO

General Motors' purchase of subprime lending company AmeriCredit for $3.5 billion later in 2010 may be the first step toward building a full-blown captive finance division.

AmeriCredit does not have the capital that other carmakers’ finance arms do, and the company is mainly a used-car lender catering to borrowers with poor credit. But General Motors applauded its solid management and staying power, citing AmeriCredit as the “core” of GM’s in-house financing operations.

Now, GM has Ally Financial, previously GMAC Financial, for most mainstream financing and AmeriCredit for subprime lending and some leasing endeavors. This affords GM dealerships almost as much coverage as Ford dealers receive from Ford Motor Credit.

The AmeriCredit purchase will enhance GM’s “competitiveness in auto finance offerings,” CEO Ed Whitacre stated in a conference call announcing the acquisition last week. The purchase also improves GM’s readiness to launch an initial public offering.

According to a Reuters report last week, GM intends to file registration for its IPO in the week of August 16, almost immediately after the date that the automaker is expected to report its second-quarter results.

Aside from enabling GM to sell vehicles to more consumers, a captive finance arm can also create its own profits. For instance, Ford Credit announced second-quarter pretax operating profits of $888 million.

GM’s acquisition of AmeriCredit arrived as Ford Credit hit a temporary financing obstacle.

According to The Wall Street Journal, Ford Credit postponed the sale of bonds supported by car loans in the aftermath of financial reforms that President Obama signed into law last week.

These asset-supported bonds, designed to raise money for future lending, are required by law to have attached credit ratings. However, rating services—including Fitch, Standard and Poor’s, and Moody’s—now will not permit the publishing of their ratings, even though they persist in making ratings part of the bond offering. The rating organizations are responding to new regulations that allow investors to sue them more easily.

The problem could have frozen the sale of bonds. However, on July 23, the SEC released a “no action” letter permitting asset-backed bond sales sans credit ratings for six months. The Securities Industry and Financial Markets Association said the move assisted in “avoiding the potential for negative impact on the availability of financing.”

Temporarily, the scheduled acquisition of AmeriCredit leaves General Motors’ partnership with Ally Financial intact, guaranteeing the continuation of financing for the floorplans of GM dealers.