DBRS Upgrades General Motors Financial Company, Inc. to BBB, Trend Stable

DBRS, Inc. (DBRS) has today upgraded the Issuer and Senior Unsecured Debt rating of General Motors Financial Company, Inc. (GMF or the Company) to BBB from BBB (low) and the Short-Term Instruments rating to R-2 (middle) from R-3. Further, the Guaranteed Senior Unsecured Notes rating of General Motors Financial Company of Canada, Ltd were upgraded to BBB from BBB (low) reflecting the guarantee from GMF. The trend on all ratings is Stable. This rating action follows DBRS’s upgrade of General Motors Company (GM or the Parent) to BBB from BBB (low).

The ratings of GMF reflect the ownership of the Company, and DBRS’s view that GMF is a strategic subsidiary of GM, supporting the Parent’s new vehicle sales by providing financing to GM customers and dealers. Moreover, the ratings consider the support agreement between GMF and GM that requires GM to make a capital contribution should the Company’s leverage ratio exceed certain established levels. As a result, DBRS assigns an SA1 support assessment to GMF reflecting DBRS’s view that GM would likely support the Company, if required. As a supported rating with an SA1 designation, the ratings of GMF are linked to GM and are likely to move in tandem.

The Stable trend reflects that of the Parent. The trend also considers DBRS’s expectation that GMF’s earnings will improve modestly in 2016 as the Company begins to generate positive operating leverage benefitting from growth in earning assets, while investments in infrastructure moderate. DBRS expects this improved operating performance despite an expected shift in the operating environment during 2016, including normalizing credit costs and used vehicle values, as well as potentially higher interest rates. While DBRS expects the growth rate of U.S. auto sales volumes to moderate in 2016, DBRS anticipates that GMF will continue to benefit from growing origination volumes supported by improving penetration of GM sales, and overall, healthy GM sales.

The ratings also consider the intrinsic strength of GMF, which benefits from the overall strengthening franchise and broadening presence as GM’s captive finance company. During 4Q15, GMF’s penetration rate of GM U.S. sales increased to 33.4% from 13.4% in 4Q14, demonstrating the benefits of becoming the exclusive provider of GM subvented leasing and lending during 2015. Moreover, GMF’s deeper and broader suite of products supported strong expansion in retail origination volumes, which totaled $37.7 billion, up from $21.3 billion a year ago. While a positive for the franchise and earnings, DBRS sees the expansion of leasing activities at a time when used vehicle values are expected to moderate as introducing additional risk. However, DBRS expects that GMF will set residual values appropriately.

For 2015, GMF generated net income of $646 million, a 20% improvement from 2014. Results benefited from equity income from the China JV that was acquired on January 1, 2015, as well as solid operating performance partially offset by headwinds from foreign currency movements. DBRS expects that GMF’s strengthening franchise will support further improvement in the Company’s earnings generation capacity as 2016 progresses. Nevertheless, DBRS sees higher provisioning expense due to growth in the loan portfolio and credit normalization, lower financing margins as the loan portfolio shifts to more prime quality lending, and higher funding costs as GMF continues to make progress towards a more unsecured funding profile as potential headwinds to more robust earnings expansion.

From DBRS’s perspective, GMF continues to maintain a sound balance sheet. Credit losses were stable in 2015 at 1.9% of average retail loans benefiting from the ongoing shift in the portfolio’s credit mix to a more prime oriented focus, as well as still healthy used vehicle values. Liquidity is ample with GMF holding $14.7 billion of available liquidity at December 31, 2015, not including GMF’s borrowing capacity under GM’s corporate revolvers. Importantly for the Company’s intrinsic strength, asset encumbrance continues to be reduced as unsecured funding becomes a larger component of the overall funding profile. During 2015, leverage (net-earning assets-to-tangible net worth) expanded to 8.3x, as expected due to growth in both the lease and lending portfolios. Meanwhile, the Company’s tangible common equity-to-tangible assets ratio was 10.6% at year-end 2015, remaining in line with the Company’s captive peers.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Finance Companies (October 2015). Other applicable methodologies include Rating Companies in the Auto Manufacturing Industry (October 2015), DBRS Criteria – Rating Holding Companies and Their Subsidiaries (January 2016), and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2016). These can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Rating Committee Chair: William Schwartz
Initial Rating Date: 15 May 2014
Most Recent Rating Update: 12 October 2015

For additional information on this rating, please refer to the linking document under Related Research.