Wagoner May Say GM Lost $2 Billion on Leases in SUV-Value Drop
Losses on so-called residual values of the vehicles may also prompt GMAC LLC, partly owned by GM, to ``significantly'' curtail leasing, said Lehman Brothers analyst Brian Johnson. Leasing accounts for 28 percent of the Detroit-based automaker's U.S. sales this year.
Chrysler LLC said it would stop leasing and Ford Motor Co.'s credit unit last week reported a $2.1 billion pretax writedown for losses on the transactions, twice what analysts forecast.
``It's surprising how quickly these values have fallen off a cliff,'' said Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, which oversees $22 billion in assets, including GM bonds.
The automaker's leasing loss may exceed $1 billion, he said. ``Residual values are going to be the wild card for GM in the quarter.''
Exiting or limiting leasing may further thwart Wagoner's drive to end losses that totaled $54 billion since 2004. His strategy has been to cut manufacturing costs and shift GM's emphasis to cars from trucks, which make up about 60 percent of U.S. sales.
What It's Worth
The residual value is what a vehicle is worth when a customer returns it at the end of a lease. Gasoline that topped $4 a gallon this year has depressed demand for SUVs and other light trucks and reduced their value.
A possible $3 billion expense for residual-value shortfalls at GMAC may require a $2.3 billion expense for the carmaker on top of a $1.4 billion automotive loss, Johnson said.
``This is clearly one more headwind they have to fight,'' said Johnson, who advises holding and forecasts a $3.37-a-share loss. ``If they end leasing, it could end up being a 5 to 10 percent headwind to sales.''
Johnson had predicted on June 20 a $1.5 billion expense at GMAC, which reports second-quarter results today.
GM's net loss may end up being 50 percent bigger than Ford's $8.7 billion shortfall, he said.
Tomorrow GM may report a loss of $2.41 a share, excluding some costs, according to the average of 13 analysts surveyed by Bloomberg. On that basis, GM reported a profit of $1.3 billion, or $2.48 a share, for the year-earlier period and net income of $891 million, or $1.56 per diluted share.
The company won't discuss results for the latest quarter before they're released, spokeswoman Renee Rashid-Merem said.
Down 54%
GM fell 50 cents, or 4.2 percent, to $11.40 in New York Stock Exchange composite trading yesterday. The stock has lost 54 percent of its value this year.
The automaker said on July 15 it would have a ``significant'' second-quarter loss. It previously detailed $2 billion in pretax losses from production cutbacks resulting from labor disputes at plants and a supplier. GM also said it was ending the 25 cents-a-share quarterly dividend and trimming salaried payroll costs by 20 percent.
If GMAC, owned 49 percent by GM and 51 by Cerberus Capital Management LP, were to end leasing in the U.S. for General Motors vehicles, the carmaker would lose as many as 3 percent of its buyers, said Art Spinella, president of Bandon, Oregon-based CNW Market Research.
Chrysler, owned by Cerberus, the New York-based private- equity firm, said last week it would end leases today. Leases account for 22 percent of the company's sales, Spinella said.
Drop in Value
Almost 800,000 of the least fuel-efficient SUVs will be returned by buyers this year on two- or three-year leases. The models will each be worth about $6,100 less than GM, Ford and other automakers initially figured, said Spinella, who collects leasing data from dealers and banks.
That's a $4.9 billion shortfall for the industry, he said.
Ford this week said it would raise credit standards to make it harder to lease trucks, while GMAC said it would no longer offer subsidized leases in Canada, making them less attractive to buyers. Such deals may include inflated assumptions about residual values or below-market finance rates.
JPMorgan Chase & Co. also said it will end leases on Chrysler models today. Wells Fargo & Co. said it's halting the contracts for all models.
``This is pretty bad,'' Spinella said. ``So many different issues are converging right now for automakers.''
`Incentivized' Deals
GM North American sales chief Mark LaNeve told dealers in an e-mail yesterday that the automaker will offer ``incentivized'' U.S. auto leases at least through August. He didn't address future months and said leasing will continue to make up less of the automaker's sales in the future.
GMAC has been boosting U.S. auto-lending standards since the fourth quarter and hasn't announced any plans to change U.S. leases, spokeswoman Gina Proia said yesterday.
About 7 percent of prospective U.S. auto buyers wouldn't buy new vehicles if subsidized leases were unavailable, Spinella said. Leases account for 15 percent of all sales, he said.
Automotive Lease Guide, which banks use to set residual values, said it's lowering those for full-size SUVs about 8.7 percentage points, spokesman Fernando Ubeda said. An 8 percentage-point cut in residual values would add $100 to the monthly cost of a $45,000 vehicle, Deutsche Bank analyst Rod Lache wrote in a July 29 report.
Without attractive leases, it will cost consumers more to buy a car or truck. A well-appointed 2008 Chevrolet Tahoe would cost about $610 a month on a three-year lease compared with $795 per month if purchased with a typical five-year loan, said Bruce Litvin, sales manager at Joe Lunghamer Chevrolet in Waterford, Michigan.
``We're already selling less units in a given month than we used to,'' Litvin said in an interview. ``If you take away leases you could drive dealerships like ours to barely a trickle.''