AmeriCredit's Retreat Continues to Pay Off Morningstar.com
Now that the company is once again able to originate loans, we believe decreased competition for subprime borrowers, better underwriting, and an improvement in the quality of the typical borrower will work in its favor, resulting in substantial profits for AmeriCredit over the next few years. Our largest concern--the financing environment--has improved somewhat, but we expect AmeriCredit to face higher funding costs for the near future as a result of its dependence on the still-moribund securitization markets. Although this will reduce profits, we believe the business is still viable under these conditions for several reasons. First, AmeriCredit's loans come with interest rates comparable to credit cards. Double-digit net interest margins provide a large cushion against losses. Unlike credit cards, though, AmeriCredit's loans are collateralized by a vehicle. Used-car values fluctuate over time, but a used-car bubble or bust seems unlikely to us. Instead, loss rates should continue to mirror the state of the general economy. Used-car loan interest rates also seem less likely to be targeted by legislators than those on payday loans, credit cards, or other types of high-interest-rate lending. In our opinion, these factors should contribute to investors' eventual willingness to finance AmeriCredit's business at reasonable rates, whether through the securitization markets or other channels.
