Look out below: AmeriCredit (ACF) and GMAC (GJM) are falling fast
Today's Financial News - Posted October 29, 2008
The trouble in the subprime market is not limited to the home-mortgage industry. Companies that dealt with low-quality car loans are in just as much trouble, or more. Lenders like AmeriCredit (NYSE:ACF) could be out of business quite soon.
By Andrew Snyder
Baltimore – (TFN): If you thought lending in the home-mortgage lending industry was tight, you will be shocked by the woes in the auto-lending world. This subprime debacle is destroying one company after the other.
Just this morning, GMAC (NYSE:GJM) announced it has stopped issuing car loans in seven European countries. October 31 will be the last day for folks from Finland, Norway, Greece, the Czech Republic, Portugal, Spain, and Slovakia to get loans from General Motor’s (NYSE:GM) finance arm. The news proves the desperate situation the entire industry is in.
This is far from the first news we have heard from the gigantic lender. GMAC recently announced it was drastically raising its lending standards and its borrowing rates. Now, if you are going to get a loan from the company you are going to pay an exorbitant price and you had better have squeaky-clean credit.
Spreading the pain
It is the same situation across the auto-loan industry. Look at companies like AmeriCredit Corp (NYSE:ACF), United PanAm Financial (NASDAQ:UPFC) and Consumer Portfolio Services (NASDAQ:CPSS). Both companies have given their shareholders terrible nightmares over the past twelve months.
Just yesterday, AmeriCredit took its investors for a wild ride as share price tumbled by over 50% at one point during the trading day. Shares hit five-year lows as Wall Street dealt with the very real chance this company may have some liquidity issues capable of dealing a death blow.
As the economy turns sour, AmeriCredit, and its large stance in the subprime auto-lending industry, may not have the cash it needs to pay its future obligations. For instance, the company has a $2.5 billion payment due early next year that it has no idea how to deal with.
With its credit losses piling up higher and higher, the company’s chances of finding the cash to ensure the multi-billion dollar check will not bounce are getting smaller by the day. Right now, it has just $244 million in reserves.
With news like that, it is hard to believe share price has found the support that it has. Look for more price drops over the next few weeks.
For options investors, AmeriCredit offers some profit potential. While options are fairly expensive across the board, this company’s impending doom gives put buyers and call sellers a chance to make some money. Options with a January expiration are looking particularly appetizing, especially for sellers.
With fewer folks willing to re-purchase the debt of companies in the auto-financing industry, the future will be tight. GMAC has a shot at success thanks to help from the Federal Reserve and the multiple life preservers it has tossed into the stormy sea. But for smaller companies like AmeriCredit, Consumer Portfolios Services, and United PanAm, the good times may be permanently over.
As these companies struggle, there will be plenty of investing opportunities. Pay attention to their actions and you can win no matter which way the industry moves.
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