DBRS Confirms GMF at BBB, Stable, on Announcement to Sell Euro Finance Operations

DBRS, Inc. (DBRS) has today confirmed the Issuer and Senior Unsecured Debt rating of General Motors Financial Company, Inc. (GMF or the Company) at BBB and its Short-Term Instruments rating at R-2 (middle). The Support Assessment was confirmed at SA1. Further, the Guaranteed Senior Unsecured Notes rating of General Motors Financial Company of Canada, Ltd was confirmed at BBB, reflecting the guarantee from GMF. The trend on all ratings is Stable. The rating action follows DBRS’s confirmation of General Motors Company (GM or the Parent) ratings, which followed the announcement that General Motors Holdings LLC (GMH), a wholly owned subsidiary of GM had entered into a Master Agreement with PSA Group (PSA), where PSA along with a financial partner will acquire GMH’s European financial subsidiaries and branches (Fincos), as well as the Parent’s Opel and Vauxhall businesses and certain other assets in Europe, for total consideration of $2.2 billion.

As regards to other details of the transaction, the consummation of the transaction is subject to the satisfaction of a number of closing conditions and actions. The transfer of the Opel/Vauxhall business is expected to close at YE2017. The transfer of the Fincos will close as soon as practicable and could occur as late as 18 months after the closing of the Opel/Vauxhall businesses. Additionally, and related to the transaction, GMF expects to recognize a non-cash charge of between $700 million to $800 million, including a disposal loss charge of between $250 million and $400 million, a tax liability of approximately $100 million, and a charge related to the recognition of foreign currency translation losses to be determined at the closing date.

Given the strong linkage between GMF and its parent, DBRS sees no impact to the ratings or trend. While the sale of the Fincos will result in a modest reduction in the Company’s top line revenue and remove a degree of revenue diversification, the transaction affords the Company the opportunity to focus its resources on its faster growth North American operations, which have driven most of the Company’s recent revenue growth. DBRS notes that approximately 83% of 2016 revenues were generated from the North American operations. Further, although the Company’s earning asset balance will be lowered with the sale of the assets, GMF anticipates that the impact to its leverage ratio will be neutral at the close of the Fincos transaction, as the Company expects to retain half of the approximately $1.0 billion in consideration for Fincos.

The ratings reflect DBRS’s view that GMF is an integral 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 maintains 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 ratings and Stable trend also consider the intrinsic strength of GMF, which benefits from the overall strengthening of the North American business, where GMF’s penetration rate of GM U.S. retail sales stood at 32.2% at 4Q16, up considerably from 13.4% in 4Q14, demonstrating the benefits of becoming the exclusive provider of GM subvented leasing and lending over the last two years. Moreover, GMF’s deeper and broader suite of products supports the strong expansion in retail origination volumes, which totaled $43.4 billion in 2016, up from $37.7 billion a year ago. DBRS notes that approximately 84% of 4Q16 originations were from North American operations.

GMF continues to maintain sound balance sheet fundamentals. Despite the maturing credit cycle and normalizing used vehicle values, the Company’s credit performance in the North American portfolio remains solid, benefiting from its well established servicing capabilities and increasing preponderance of loan and lease originations to customers with prime credit scores. North American net credit losses for 2016 represented a manageable 2.6% of average retail loans, down 10 basis points from 2015, benefiting from the ongoing shift in the portfolio’s credit mix to a more prime oriented focus. Finally, at YE2016, GMF’s liquidity was ample and capitalization was acceptable.

RATING DRIVERS
Given the linkage, an upgrade of General Motor Company’s rating would likely have positive implications for GMF. Similarly, given the linkage, a negative rating action on the Parent would likely result in negative rating implications for GMF. Any sustained and substantial weakening of GMF’s fundamentals or a prolonged inability to access the capital markets could have negative rating implications.

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

The applicable methodologies are Global Methodology for Rating Finance Companies (October 2016), Rating Companies in the Automotive Manufacturing Industry (October 2016), DBRS Criteria - Rating Corporate Holding Companies and Their Subsidiaries (December 2016) and DBRS Criteria - Guarantees and Other Forms of Support (February 2017), which can be found on our website under 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: Mark Nolan, Vice President
Rating Committee Chair: William Schwartz, Senior Vice President
Initial Rating Date: 15 May 2014
Last Rating Date: 10 March 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.