General Motors Merger
On October 1, 2010, pursuant to the terms of the Agreement and Plan of Merger (the "Merger Agreement"), dated as of July 21, 2010, with General Motors Holdings LLC ("GM Holdings"), a Delaware limited liability company and a wholly-owned subsidiary of General Motors Company ("GM"), and Goalie Texas Holdco Inc., a Texas corporation and a direct wholly-owned subsidiary of GM Holdings ("Merger Sub"), GM Holdings completed its $3.5 billion acquisition of AmeriCredit Corp. via the merger of Merger Sub with and into AmeriCredit Corp. (the "Merger" or "acquisition"), with AmeriCredit Corp. continuing as the surviving company in the Merger and becoming a wholly-owned subsidiary of GM Holdings. Following the Merger, our name was changed to General Motors Financial Company, Inc. ("GM Financial" or the "Company").
Purchase Accounting
The Merger has been accounted for under the purchase method of accounting, whereby the purchase price of the transaction was allocated to our identifiable assets acquired and liabilities assumed based upon their fair values. The estimates of the fair values recorded were determined based on the fair value measurement principles (see Note 12 – "Fair Values of Assets and Liabilities" to the consolidated financial statements included in this Form 10-K for additional information) and reflect significant assumptions and judgments. Material valuation inputs for our finance receivables included adjustments to monthly principal and finance charge cash flows for prepayments and credit loss expectations; servicing expenses; and discount rates developed based on the relative risk of the cash flows which considered loan type, market rates as of our valuation date, credit loss expectations and capital structure. Certain assumptions and judgments that were considered to be appropriate at the acquisition date may prove to be incorrect if market conditions change.
The results of the purchase price allocation included an increase in the total carrying value of net finance receivables, medium term note facility payable, Wachovia funding facility payable, securitization notes payable, deferred tax assets and uncertain tax positions as well as intangible assets. Management believes all material intangible assets have been identified.
The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill. The goodwill amount was $1.1 billion.
Definitive Agreement to Acquire Certain Ally Financial International Operations
In November 2012, we entered into an agreement with Ally to acquire 100% of the outstanding equity interests of its automotive finance and financial services operations in Europe and Latin America and a separate agreement to acquire Ally’s non-controlling equity interests in GMAC-SAIC Automotive Finance Company Limited ("GMAC-SAIC"), which conducts automotive finance and other financial services in China. The combined consideration will be approximately $4.2 billion, in cash, subject to certain closing adjustments. The transactions are anticipated to be funded by an estimated $2 billion capital contribution from GM, our excess liquidity and incurrence of additional debt. These transactions will enable us to provide automotive finance and other financial services to customers in European, Latin American and Chinese markets. The transactions contemplated by the agreements are subject to satisfaction of certain closing conditions, including obtaining applicable regulatory approvals and third party consents and other customary closing conditions, and are expected to close in stages throughout 2013. If the entire acquisition is completed, our assets would increase to approximately $33 billion and our consolidated debt would increase to approximately $27 billion.
GM Revolving Credit Facility
In November 2012, GM entered into a three-year, $5.5 billion secured revolving credit facility that includes a GM Financial borrowing sub-limit of $4.0 billion ("GM Revolving Credit Facility"). We may borrow against this facility for strategic initiatives and for general corporate purposes. Neither we, nor any of our subsidiaries, guarantee any obligations under this facility and none of our or our subsidiaries' assets secure this facility.
GM Financial, the wholly-owned captive finance subsidiary of GM, is a provider of automobile financing solutions with a portfolio of approximately $13.3 billion in auto loans and leases and commercial and dealer loans as of December 31, 2012. We have been operating in the automobile finance business since September 1992. Our strategic relationship with GM began in September 2009 and includes a subvention program pursuant to which GM provides its customers access to discounted financing on select new GM models by paying us cash in order to offer lower interest rates on the loans and leases we purchase from GM-franchised dealerships.
We purchase auto finance contracts for new and used vehicles from GM and non-GM franchised and select independent automobile dealerships. We primarily offer auto financing to consumers who typically are unable to obtain financing from traditional sources such as banks and credit unions. We utilize a proprietary credit scoring system to differentiate credit applications and to statistically rank-order credit risk in terms of expected default rates, which enables us to evaluate credit applications for approval and tailor loan and lease pricing and structure. We service our loan and lease portfolios at regional centers using automated loan servicing and collection systems. Funding for our auto finance activities is primarily obtained through the utilization of our credit facilities and through securitization transactions.
We have historically maintained a significant share of the sub-prime auto finance market and have, in the past, participated in the prime sectors of the auto finance industry to a more limited extent. We source our business primarily through our relationships with automobile dealerships, which we maintain through our regional credit centers, marketing representatives (dealer relationship managers) and alliance relationships. We believe our growth and origination efforts are complemented by disciplined credit underwriting standards, risk-based pricing decisions and expense management.
As GM's captive finance subsidiary, our business strategy includes increasing the amount of GM new automobile sales by offering competitive financing programs, while at the same time continuing to remain a valuable financing source for loans for non-GM dealers. In addition to our GM-related loan origination efforts, we offer a full credit spectrum lease financing product for new GM vehicles exclusively to GM-franchised dealerships in the United States. Through the acquisition of an independent auto lease provider in Canada, in April 2011, we also offer lease financing for new GM vehicles in Canada. In April 2012, we expanded our business to include commercial lending for GM-franchised dealerships in the U.S. and, in 2013, we expect to expand our commercial lending business for GM-franchised dealers in Canada. Additionally, in August 2012, we expanded our Canadian business to include sub-prime consumer financing for GM-franchised dealers. Evidence of our increasing linkage with GM can be seen in our results for fiscal 2012, during which our percentage of loans and leases for new GM vehicles increased to 44% of our total consumer originations volume, up from 40% for fiscal 2011.
We were incorporated in Texas on May 18, 1988, and succeeded to the business, assets and liabilities of a predecessor corporation formed under the laws of Texas on August 1, 1986. Our predecessor began operations in March 1987, and the business has been operated continuously since that time. Our principal executive offices are located at 801 Cherry Street, Suite 3500, Fort Worth, Texas, 76102 and our telephone number is (817) 302-7000.
Consumer
Target Market. Most of our automobile finance programs are designed to serve customers who have limited access to automobile financing through banks and credit unions. The bulk of our typical borrowers have experienced prior credit difficulties or have limited credit histories and generally have credit bureau scores ranging from 500 to 700. Because we generally serve customers who are unable to meet the credit standards imposed by most banks and credit unions we generally charge higher rates than those charged by such sources. Since we provide financing in a relatively high-risk market, we also expect to sustain a higher level of defaults than these other automobile financing sources.
Marketing. As an indirect auto finance provider, we focus our marketing activities on automobile dealerships. We are selective in choosing the dealers with whom we conduct business and primarily pursue GM and non-GM manufacturer franchised dealerships with new and used car operations and a limited number of independent dealerships. We generally finance new GM vehicles, moderately-priced new vehicles from other manufacturers, and later-model, low-mileage used vehicles. Of the contracts purchased by us during fiscal 2012, 94% were originated by manufacturer franchised dealers and 6% by select independent dealers; further, 48% were used vehicles, 31% were new GM vehicles (not including new GM vehicles that we leased during the year) and 21% were new non-GM vehicles. We purchased contracts from 12,753 dealers during fiscal 2012. No dealer location accounted for more than 1% of the total volume of contracts purchased by us for that same period.
We maintain non-exclusive relationships with the dealers. We actively monitor our dealer relationships with the objective of maximizing the volume of applications received from dealers with whom we do business that meet our underwriting standards and profitability objectives. Due to the non-exclusive nature of our relationships with dealerships, the dealerships retain discretion to determine whether to obtain financing from us or from another source for a contract made by the dealership to a customer seeking to make a vehicle purchase. Our representatives regularly contact and visit dealers to solicit new business and to answer any questions dealers may have regarding our financing programs and capabilities and to explain our underwriting philosophy. To increase the effectiveness of these contacts, marketing personnel have access to our management information systems which detail current information regarding the number of applications submitted by a dealership, our response and the reasons why a particular application was rejected.
We generally purchase finance contracts without recourse to the dealer. Accordingly, the dealer has no liability to us if the consumer defaults on the contract unless a recourse agreement has been executed. Although finance contracts are generally purchased without recourse to the dealer, the dealer typically makes certain representations as to the validity of the contract and
compliance with certain laws, and indemnifies us against any claims, defenses and set-offs that may be asserted against us because of assignment of the contract or the condition of the underlying collateral. Recourse based upon those representations and indemnities would be limited in circumstances in which the dealer has insufficient financial resources to perform upon such representations and indemnities. We do not view recourse against the dealer on these representations and indemnities to be of material significance in our decision to purchase finance contracts from a dealer. Depending upon the contract structure and consumer credit attributes, we may charge dealers a non-refundable acquisition fee or pay dealers a participation fee when purchasing finance contracts. These fees are assessed on a contract-by-contract basis.
Origination Network. Our origination platform provides specialized focus on marketing our financing programs and underwriting loans and leases. Responsibilities are segregated so that the sales group markets our programs and products to our dealer customers, while the underwriting group focuses on underwriting, negotiating and closing loans and leases. Our sales and underwriting groups are further segregated with separate teams servicing GM-franchised dealers and non-GM dealers, allowing us to continue efficient service for our non-GM dealers under the “AmeriCredit” brand while providing GM-franchised dealers the broader loan, lease and commercial lending products we offer under the “GM Financial” brand. The underwriters are based in credit centers while the dealer relationship managers are based in credit centers or work remotely in their service area. We believe that the personal relationships our credit underwriters and dealer relationship managers establish with the dealership staff are an important factor in creating and maintaining productive relationships with our dealer customer base.
We select markets for credit center locations based upon numerous factors, most notably proximity to the geographic markets and dealers we seek to serve and availability of qualified personnel. Credit centers are typically situated in suburban office buildings.
A credit center vice president, regional credit managers, credit managers and credit underwriting specialists staff credit center locations. The credit center vice president reports to a senior vice president in our corporate office. Credit center personnel are compensated with base salaries and incentives based on overall credit center performance, including factors such as credit quality, pricing adequacy and volume objectives.
The credit center vice presidents, regional credit managers and senior vice presidents monitor credit center compliance with our underwriting guidelines. Our management information systems provide these managers with access to credit center information enabling them to consult with credit center teams on credit decisions and assess adherence to our credit and pricing policies. The senior vice presidents also make periodic visits to the credit centers to conduct operational reviews.
Dealer relationship managers typically work from a home office but are aligned with a credit center. Dealer relationship managers solicit dealers for applications and maintain our relationships with the dealers in their geographic vicinity, but do not have responsibility for credit approvals. We believe the local presence provided by our dealer relationship managers enables us to be more responsive to dealer concerns and local market conditions. Applications solicited by the dealer relationship managers are underwritten at our regional credit centers. The dealer relationship managers are compensated with base salaries and incentives based on contract volume objectives and dealer penetration rates. The dealer relationship managers report to regional sales managers who report to sales vice presidents.