AmeriCredit's CEO Tackles Industry Concerns

FORT WORTH, Texas — Addressing the unstable credit market and liquidity concerns by many in the industry who are keeping a particularly watchful eye on subprime companies, AmeriCredit's president and chief executive officer reassured analysts that his company has no fears.

In fact, Dan Berce said quarterly net credit losses were the lowest in the company's history, which can be attributed both to seasonal improvements and the change in AmeriCredit's portfolio to more prime and near-prime auto loans.

"Before we proceed, I would like to take a few minutes to address our capital funding position," Berce said in the company's conference call. "The credit markets have grown increasingly volatile over the last few weeks, and there are concerns about liquidity across sectors.

"AmeriCredit has a strong balance sheet, with more than $900 million in unrestricted cash at the end of the quarter, and committed unused warehouse capacity of more than $3.5 billion at July 31," he continued. "Our warehouse funding agreements have fixed advance rates and no mark or market or margin call provisions. We completed a $1.5 billion securitization in July and are not scheduled to go back to the securitization market until sometime this fall.

"At that time, we anticipate there will be sufficient liquidity in the market to successfully execute a securitization transaction, albeit at wider spreads than our recent deals," he noted.

Later in the conference call, Berce further addressed market concerns saying, "There continues to be widespread concern over the impact of subprime mortgages on the performance of auto and other consumer loan portfolios, the capital markets and the general economy.

"Obviously, we are seeing some spillover impact on the efficiency of capital markets," he said. "As evidenced by our solid credit metrics, we are not seeing an impact on our portfolio performance. Historically, our homeowners perform better than our non-homeowners, and their relative performance did not change during the June quarter."

Overview of Company's Portfolio

Moving on to discuss the company's portfolio, Berce said AmeriCredit originated $2.5 billion in loans and leases for the quarter, compared with $2.5 billion last quarter and $1.7 billion in the June 2006 quarter.

"Consistent with expectations expressed in our April earnings call, origination volume held firm at the solid levels we saw during the March quarter," he explained. "We had a slight sequential decline in subprime originations offset by growth in our specialty prime and near-prime originations."

Not including Bay View and Long Beach, Berce said the company's core originations grew 17 percent over the last year. Moreover, of the origination volume for the quarter, $337 million was originated via the company's Long Beach platform, while $233 million came through the Bay View platform. For the quarter, he indicated that Bay View contributed $78 million of originations.

He also highlighted that the company worked with about 15,300 dealers in the quarter, which is up slightly from March and includes 1,600 more dealers than the same time last year.

The company said its total managed portfolio reached $15.9 billion, up from $15.2 billion in the prior quarter. Under the portfolio, executives said $2 billion is from Long Beach, while $1.1 billion is from Bay View.

"On the integration front, we are on track with our timeline," Berce said. "The transition of Long Beach's back office and support functions is expected to be completed by the end of September. And, we continue to make progress on merging the AmeriCredit core, Long Beach and Bay View sales and credit functions to create one seamless underwriting platform covering our full-spectrum of loan products for our dealers.

He went on to report, "Competition in the auto finance sector continues to be strong. Over the past year, we have seen pressure on loan terms and loan-to-value, as well as the net fees we receive at origination. The net-interest margin on loans originated during this June quarter was weaker than our targeted levels. As a result, we have implemented pricing increases in July to boost margins in most of our loan programs, and we are seeing signs of early improvement."

Further explaining credit losses, officials said the company's portfolio net losses came in at 3.3 percent, which reflects a typical seasonal downswing, in addition to the prime and near-prime business improving risk. Net losses in the company's core portfolio were 3.8 percent, down from 5.2 percent in the last quarter and 4.1 percent from a year ago.

"Recovery rates for the June 2007 quarter were 51.3 percent, compared to 49.5 percent last quarter and 49.9 percent a year ago," Berce said. "In general, we expect used-car pricing to remain firm throughout fiscal-year 2008, but seasonally weaker, as usual, toward the end of the calendar year."

Financial Overview

Berce then switched over to Chris Choate, chief financial officer, who discussed earnings. He reported that net income came in at $87 million, or 66 cents per share, for the quarter.

He went on to say that net-interest margin of 11.1 percent represented a 30-basis-point decline from the March period. Net-interest margin was 13 percent for the June 2006 period.

"The decline in net interest resulted from several factors," he explained. "One, we have added more prime and near-prime loans. At June 30, 2007, prime and near-prime loans, consisting of loans with FICO scores above 620, represented 38 percent of our outstanding portfolio, compared to 26 percent a year ago.

"These better credit quality loans have lower margins," Choate continued. "Second, securitizations with a lower cost of funds continue to run-off. Finally, as Dan mentioned earlier, our loan pricing on recent originations has not kept pace with the higher funding costs on our warehouse lines and new securitizations resulting from increases in the benchmark interest rates."

Commenting on overall business, Choate said, "Bottom line, we continue to be confident in our funding platform and our ability to obtain financing. Although spreads on our ABS deals will widen, benchmark rates have declined, meaning that our overall cost of funds may not be materially impacted.

"Given our liquidity position and ample warehouse capacity, we have the flexibility to manage the timing of our next securitization in light of changing market conditions," he said.

Future Expectations

AmeriCredit updated its net-income guidance for fiscal 2008 to $320 to $350 million.

"We earned $306 million, or $2.32 per share in fiscal-year 2007, excluding the gain from the sale of DealerTrack's shares and the tax reserve adjustment," Berce explained. "The updated net income and earnings-per-share forecasts reflect slight changes in our expectations for key performance metrics.

"To put these slight changes into perspective, a 10-basis point movement in a key performance metric, such as credit losses or net interest margin, has approximately $10 million impact on net income and approximately 8 cents impact on earnings per share," he said. "Additionally, earnings per share were adjusted to include the approximately 4 million shares repurchased through Aug. 8, 2007."

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