General Motors Co. and its financing affiliate GMAC Inc. are eyeing an Aug. 1 return to the auto-leasing market, according to people familiar with the matter, after massive government bailout packages allowed both companies to get back on their feet.
GM and Chrysler Group LLC pulled out of leasing in August 2008 amid a steady decline in vehicle resale values, a sales slump and troubles at their respective lending affiliates.
At the time, leasing represented about 20% of GM’s new-car business in the U.S. and was causing losses for GM and other car makers.
Many of their key competitors, including Ford Motor Co., Daimler AG and Toyota Motor Corp., scaled back leasing but didn’t pull out of the business completely.
In a recent conference call with analysts and reporters, GM said many of the company’s former lease customers have decided to purchase vehicles instead from GM, or chose to buy a used car or defect to another auto maker.
GM, which filed for bankruptcy in June and emerged from court in early July, has said credit availability still remains a key drag on auto sales.
Details of GM’s leasing plans are still being hammered out, but people familiar with the program said the company is looking at various models across its four-brand lineup as candidates for leasing. Those include the Cadillac CTS, which competes in a luxury market that is heavily dependent on the availability of lease deals.
GM spokesman Pete Ternes said the car maker has been studying ways to get back into leasing, but couldn’t comment on the company’s exact plans because they aren’t finalized.
GMAC spokeswoman Gina Proia said her company “continues to evaluate ways to support” the auto industry with financing packages and “leasing is one of the options we are evaluating.”
A GM executive working on the plans said the auto maker has talked with several banks as well to obtain financing for leasing. “Credit is easing, banks have capacity and [resale] values have been steadily increasing,” the executive said.
After running into serious liquidity problems in late 2008, both GM and GMAC, a former subsidiary, have been propped up by more than $60 billion in government funds. GMAC’s balance sheet was strengthened by $12 billion in federal capital in the second quarter alone.
GM sold 51% of GMAC in 2006 to Cerberus Capital Management LP, and was forced to give up an additional 40% of its stake after the December bailout of the lending firm. Currently, GM owns 9.9% of GMAC, which has become a bank holding company thanks to the bailout.
Despite GM’s shrinking stake, the auto maker and GMAC remain contractually bound as preferred partners when it comes to new-vehicle financing. GMAC recently added Chrysler Group as a strategic partner following Chrysler’s early-June emergence from bankruptcy protection. It is unclear when, or if, Chrysler will return to leasing.
Although GM dealers have been able to finance some buyers via lease programs through credit unions and other lenders over the last 12 months, those deals have represented a negligible part of its sales.
Historically, GM and GMAC were able to team up to offer cheap leases. GM would use marketing dollars, earmarked as vehicle incentives, to subsidize the cost of a vehicle lease that GMAC would originate and fund.
There are several factors behind GM’s willingness to tiptoe back into offering new-vehicle leases at its dealerships, including the firming up of resale values for used cars and trucks.
When vehicle resale values, also known as residual values, decline, the fundamentals underpinning the leasing market are damaged because lease payments are typically calculated on the assumed value of a car or truck at the end of a lease contract.
If resale values are unstable, it becomes more difficult to run a profitable leasing business.