The US car maker’s over-subscribed bond issue was a triumph of diversifying fund sources, writes Edward Russell-Walling.
It is not often that General Motors Acceptance Corporation (GMAC) sets the corporate bond market alight. But as dealers trooped back to their desks after the summer holidays, it managed to do exactly that, in a display of well-judged opportunism.
Its two-tranche e2bn jumbo bond attracted bids worth an extraordinary e9bn in one day, even though the GM finance subsidiary had been put on negative outlook by Standard & Poor’s and a downgrade was expected by many. Such was the demand for the paper that lead managers Barclays Capital, Commerzbank and Deutsche Bank could price both tranches a whole 7bp within price guidance.
Pulling off the issue on those terms – and with an increase over the original size of e1.5bn – was a small triumph for GMAC and its advisers. But it was also further evidence of the success with which the company is managing to diversify its funding sources.
GMAC is a long-established borrower in the markets, and many institutional investors, particularly those investing in US dollars, have about as much of its paper as they want or need. Added to that, the climate for US automotive names has been getting bleaker.
“The auto industry has seen pressure on its ratings,” acknowledges Cynthia Ranzilla, GMAC vice-president, US funding and global markets. “With the combination of credit ratings and widening corporate spreads in the market, we have shifted our funding programme dramatically by tapping into additional sources of liquidity developed over the past few years.”
European interest
One additional source is Europe, where euro investors have “great receptivity” to the GMAC name, according to Ms Ranzilla. The company is not new to the euro – indeed, it was issuing in Ecus before the euro existed – but it has noted a recent and rapid deepening of the euro corporate bond market.
“The euro has become much more important in the last few years,” Ms Ranzilla observes. “In 2003, if you combined all our institutional unsecured funding for US operations, we executed more in euros than in US dollars.” The September euro issue, she adds, was a “really strong validation” of how deep this market has become.
Another alternative funding source is the retail market, where GMAC pioneered so-called “retail notes”. These handy-sized, attractively-priced units of corporate paper are offered via intermediaries to individual investors. The GMAC programme, SmartNotes, raised $7bn in the US last year. Early in 2004, it was launched in Germany, the Netherlands, Switzerland and the UK, and has since raised close to e200m. The issuer for European SmartNotes is GMAC International Finance and so far, all of the proceeds have gone to the corporation’s European finance unit. GMAC plans to expand the range of European offering countries over time.
Last year, the company raised total funds of $47bn, which included a certain amount of prefunding for this year. Among other achievements, it has significantly extended its debt maturity profile. In 1998, short-term debt constituted 40% of the whole. By last year, that was down to 10%.
As well as diversifying by investor type and currency, GMAC has successfully broadened its range of funding instruments. Some 30% of 2003 funding was in the form of institutional unsecured debt (compared with 66% in 2001). The retail market accounted for another 18%. But the lion’s share – at 52% – was raised on the back of securitised assets or whole loan sales.
The motor industry has access to three broad classes of securitisable assets: retail consumer loans, dealer inventory loans and retail leases. These can be packaged in different ways, to address one of four distinct markets – the public term asset-backed market, the single-seller asset-backed corporate paper market, the third party multi-seller bank market and finally, the whole loan market for auto receivables. GMAC is active in all of them, but the last category is growing most rapidly.
“Unlike traditional securitisations, where you sell cashflows down to single-A level, here you’re selling every last dollar of cashflow,” explains Ms Ranzilla. “We’re very eager to develop that market further.”
Whole loan opportunity
Starting only in June 2003, the company raised $4bn in the whole loan market last year and plans to exceed that in 2004, Ms Ranzilla says. “We see it as a huge source of funding that can be available to us, one that’s completely different to other sources.” GMAC is aggressively pursuing securitisation for its international and non-automotive subsidiaries, she adds. These deals are invariably based on local assets – securitising US assets in foreign currency denominations has been done but is a trickier exercise.
“We have executed securitisation transactions in Canada, the UK, Australia and New Zealand,” Ms Ranzilla concludes. “And we’re working on a German transaction right now.”
