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Fitch: Captive Finance Units’ Growth and Asset Quality to Moderate

May 22, 2013, 07:05 AM
Filed Under: Captive Finance

According to Fitch Ratings, captive finance subsidiaries of major global manufacturers (captives) have continued to report very strong profit margins, driven by outstanding credit-loss performance and improved demand for their parents' products. Portfolio growth and credit quality gains are likely to moderate, however, as competition with banks heats up.

The Fitch report says most captives reported robust origination trends in 2012 and 1Q13 as access to low-cost funding remained good and demand for parent products picked up. Auto captives, including Ford Credit and General Motors Financial (GMF), have benefited from improving demand for new vehicles and stronger auto ABS volumes. Major equipment captives such as Caterpillar Financial Services and John Deere Capital have seen strong portfolio growth as better demand trends in the U.S. and Asia have offset continuing softness in Europe.

Growth rates will likely slow somewhat, as banks take advantage of abundant low-cost deposits and expand their exposure to capital-efficient consumer and commercial lending

Most major captives ended 2012 with credit-loss metrics at historic lows. This reflected the impact of a broad-based tightening of underwriting standards, as well as ongoing improvements in the U.S. labor market and rising demand for used vehicles and equipment.

Fitch says it expexts credit quality trends to normalize over the remainder of 2013 as underwriting terms begin to loosen in the face of heightened competition. In addition, used vehicle and equipment prices are likely to come under greater pressure moving into next year.

Additionally, according to the report, captives and their parents have benefited from excellent access to wholesale capital markets to diversify and strengthen their funding profiles. New sources of funding have allowed companies to term out debt maturities, while increasing liquidity buffers, in order to reduce refinancing risk and support additional portfolio growth.

Balance sheet leverage at captives remains below their five-year averages, which, given record low credit losses and expected moderation in portfolio growth, could result in increased dividends to parents. GE Capital Corp.'s (GECC) announcement that it plans to return $6.5 billion in dividends to its parent, General Electric Corp. in 2013, reflects this view.

Ratings for captives are equalized with those of their corporate parents if Fitch considers them to be core subsidiaries. Currently, all Fitch-rated captives with the exception of GMF are considered core to their parent as a result of strong integration and the critical importance of finance subsidiary activities to the parent's overall business. GMF is currently on Rating Watch Positive, reflecting our view that it will become core to GM as it acquires international operations in the near term.

For a detailed review of the financial performance and credit profiles of major captive finance companies, see "Captive Finance Companies: 2012 Comparative Analysis," dated May 20, 2013, at

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