GM and Ford’s credit arms could lose billions when car prices drop

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The financial arms of General Motors Co. and Ford Motor Co. are at risk of multi-billion dollar losses from the dramatic drop in used vehicle prices, analysts at JPMorgan Chase & Co said.

Prices are falling faster and faster than JPMorgan had expected, senior analyst Ryan Brinkman wrote in a report on Monday, citing mid-month data from Manheim. The value index of second-hand vehicles closely monitored by the car auction company fell by 11.8% during the first 15 days of April, a drop which will easily set a record if it continues throughout the month.

“The real losers in development are probably the captive finance affiliates of automakers like GM and Ford, and the car rental companies,” wrote Brinkman. If prices end the second quarter 10 percent lower than expected, he estimates losses could reach US $ 3 billion at GM Financial and US $ 2.8 billion at Ford Credit.

The spread of the coronavirus has caused a major dislocation in the used car market of $ 1.5 trillion. Physical auctions were halted for weeks with much of the rest of the economy. Once they resume, dealers and car rental companies are expected to flood them with vehicles to raise funds as they prepare for months of declining demand.

“What we are seeing right now is that the market is essentially illiquid – and these are physical auctions as well as digital auctions,” said Jennifer Laclair, CFO of Ally Financial Inc., at a call for results. The lender expected a 5-7% drop in the value of used cars for the year.

“We are a bit on hold and see, and we think we will have a much clearer idea of ​​the prices of used cars once the orders for on-site shelters are lifted and the auction activities can resume more normal levels, “said Laclair. said.

GM shares traded higher after falling 4.6% at the start of intraday trading. Ford shares fell 0.6% and Ally changed little at 11:45 a.m. in New York.

Vehicle prices are likely to come under significant pressure in the coming months as car rental companies, including Hertz Global Holdings Inc. and Avis Budget Group Inc., unload many more vehicles than usual, said Brinkman . Hertz shares plunged 8.2%, while Avis fell 6.3%.

GM and the captive finance companies of Ford and Ally are doing everything they can to limit their contribution to the glut of used vehicles at auction by offering extensions to rental customers. “It helps manage the dynamics of supply versus demand and we think the market is generally stronger,” said Laclair.

– With the help of Sophie Caronello and Jenny Surane.



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