For the past year the challenges of AmeriCredit have been widely known. Due to the extremely tight capital market their ability to raise capital to fund ongoing originations have been challenging at very best. As recently as 2007 they were generating roughly $9B in new business each year. Today, they have shrunk to perhaps 20% of that.
Add in the fact that due to rising unemployment and underemployment, collections have deteriorated significantly. This is something to be expected and happens with every economic downturn. The problem is, when you have loan covenants that cap your acceptable losses, and, at the same time sales decrease while losses increase the end results can be disastrous. Such is the predicament the team at AmeriCredit is facing today.
I took it as a portal to the future when talented co-COO Mark Floyd announced last fall he would be leaving at year's end. I have high regards for Mark, and he had guided AmeriCredit through some very tough times back in late 2002 and throughout 2003. Perhaps he didn't want to have to go through the experience yet again. Or he could have seen the handwriting on the wall.
In any case, BNET reported today in an ARTICLE
posted online that AmeriCredit "said it had breached the net charge-off covenant on its master warehouse facility above the ceiling limit of 8.5 percent for its six-month average default rate." Again, not a surprise.
As reported by BNET, unless they are able obtain a waiver of restrictive covenants, its warehouse line providers could declare an event of default, forcing accelerated debt repayments, removing AmeriCredit as a loan originator, and/or a cross default in other indebtedness, including about $750 million of unsecured corporate debt-effectively putting AmeriCredit out of business.
I dare say this is not something anyone wants to see occur, even AmeriCredits competitors as it could stand to make badly needed capital many finance companies are starving for even more difficult to obtain. Keep you fingers crossed, and hopefully this doesn't spell the end for AmeriCredit.