GM Financial: New AUD Issue
General Motors (GM) Financial (BBB/Baa3/BBB-) announced plans for a potential AUD issue. The Kangaroo BBB space has generally offered very good value for investors, and we believe this will be the case here.
In our view, a new 5- and 10-year bond could price around the 2.7% and 3.5% respectively. With yields on 10-year Australian government bonds falling to around 1.2%, many of the AUD longer-dated fixed rate corporate bonds are trading significantly higher in capital price. This would be an opportune time for investors to sell those AUD longer-dated fixed rate corporate bonds to participate in a new AUD GM Financial issue. GM Financial has a solid credit story and allows investors a way to participate indirectly into the electric vehicle (EV) growth opportunities that are taking place at the General Motors level.
GM Financial
GM Financial benefits from a support agreement from the parent, which effectively ties GM Financial’s rating to that of the parent General Motors. GM Financial is one of the larger US auto lenders across the new, used, and lease space, and it continues to grow its earning assets base as it now functions as a full-service captive to General Motors, including as sole lease provider for most brands. Given the bigger funding platform and shift in funding mix to include more unsecured debt, GM Financial will remain a frequent issuer in the debt markets as the company grows the balance sheet.
GM Financial’s ratings are tied to General Motors who is now pursing restructuring actions and investing in future secular positioning while also rewarding shareholders, which may limit upside ratings potential.
In our view, General Motors is an improving credit and well positioned in the BBB space. Over the last few years, the growth in GM Financial has reduced General Motors competitive disadvantage versus Ford and provided a solid base of financial services profitability for General Motors.
Relative Value
We note GM Financial only has one bond in the AUD market – the GM 3.85 02/21/23, which is trading with a yield inside 1%. Most of the wider BBB bonds are either in the coal-infrastructure (Aurizon, Pacific National) space and/or the airline space (Qantas).
GM Financial will offer better diversity given the company’s pursuit into EV growth opportunities and distinct lead relative to Ford in this area. General Motors has made significant strides in positioning itself relative to the secular megatrends of autonomy and electrification while maintaining a solid investment-grade rating.
Chart 1. GM Financial Relative Value
Source: Bloomberg
GM Financial Q2 2021 Highlights
GM Financial reported record Earnings Before Tax (EBT) of USD1.6bn, its highest ever, thanks to robust used vehicle pricing. GM Financial total originations for Q2 2021 was USD15.0bn, 26.5% higher YoY and 15.3% versus Q2 2019, supported by retail loan growth and higher average transaction prices (ATP). US retail loan share fell by 1% to 37.3% from last quarter. US lease originations grew YoY due to higher General Motor sales, better mix, and higher ATP.
Table 1. GM Financial Summary Highlights
| USDm | 2Q21 | 1Q21 | 4Q20 | 3Q20 |
|---|---|---|---|---|
| EBT | 1,581 | 1,182 | 1,039 | 1,207 |
| Total Origination | 15,004 | 13,992 | 13,581 | 12,833 |
| Financial % US Retail Sales | 43.0% | 44.0% | 41.0% | 43.0% |
| Ending Earning Assets | 102,658 | 100,763 | 100,187 | 96,514 |
| Annualised Net Charge-Offs | 0.4% | 0.8% | 0.9% | 1.2% |
| Delinquency Ratio | 1.5% | 1.4% | 2.1% | 2.1% |
| Allowance for Retail Loan Losses | 3.2% | 3.3% | 3.7% | 4.0% |
Source: GM Company Report
Continued strong payment rates and recovery rates on repossessed collateral has improved GM Financial annualised retail net charge-offs by 0.4% – the lowest the company has seen since at least 2010. In addition, delinquency rates are still low at 1.5% – higher sequentially but lower YoY.
As a result, a retail allowance ratio of 3.2% is lower than the first quarter of 2021, but still very high for the company’s charge-off and delinquency rate. In addition, allowances modestly increased sequentially due to higher originations increasing portfolio sizes.
Table 2. GM Financial Balance Sheet Highlights
| USDbn | 2Q21 | 1Q21 | 4Q20 | 3Q20 | 2Q20 |
|---|---|---|---|---|---|
| Ending Earning Assets | 102.7 | 100.8 | 100.2 | 96.5 | 94.0 |
| Total Debt | 93.6 | 93.7 | 92.4 | 88.8 | 92.3 |
| Available Liquidity | 29.0 | 30.2 | 27.6 | 29.1 | 25.0 |
| Tangible Equity | 13.3 | 12.6 | 12.4 | 11.4 | 9.9 |
| Leverage | 7.66x | 7.94x | 8.00x | 8.38x | 9.38x |
Source: GM Company Report
Used vehicle prices increased through FY21, which allowed GM Financial to release some of their allowances. However, higher vehicle prices have also increased the percentage of customers deciding to keep their leased vehicles. This decreased return rate decreased the benefit for GM Financial as the company can no longer resell its returned vehicles at the former record high for used vehicle prices.
As a result, although GM Financial Q2 2021 results benefitted from an increase in used vehicle prices, higher prices and lower return rates will create second half headwinds of USD1-1.5bn as allowance adjustments experienced in the first half will not repeat. Management believes this strong pricing environment will continue throughout the rest of the year and into 2022. This expectation is in line with what the broader auto industry is seeing with the dynamics of low inventory, high demand, and elevated prices.
On the funding front, GM Financial issued USD3.8bn unsecured notes in Q2 2021 and an additional USD4.6bn in Q2 2021. FY21 forecasted total funding plans call for USD$11-12bn or an additional USD2.5-3.5bn for the rest of the year.
GM Financial’s leverage in Q2 2021 improved to roughly 7.7x versus approximately 8.0x from Q4 2020, and was significantly better than roughly 9.4x at the same time last year in 2020. The current leverage ratio remains below the 11.5x Support Agreement thresholds and within the 10% managerial target. GM Financial leverage this quarter benefitted from higher net income.
