Rate and Residual Value Support Programs at GMAC and Ford Motor Credit: Big Differences in Economics ... or Disclosures?

Key Take-Away Points: 1. Both GMAC and FMC receive rate and residual value support from their parents (GM and Ford, respectively), which significantly increases the interconnectedness of their respective credit profiles. 2. Any decision made by GM and Ford to not continue these support programs at their current levels, or to change their nature, could have a negative impact on GMAC and FMC originations and penetration, and in turn on their profitability. This is especially acute for GM as it seeks to sell a controlling stake in GMAC. 3. The GM/GMAC program provides an upfront payment for rate support. In contrast, the Ford/FMC program provides installment payments. Moody's believes the GM/GMAC program benefits GMAC, as it results in GMAC having less credit exposure to its parent and enhances its liquidity position, in comparison to FMC. 4. FMC discloses the dollar amount of the rate support it receives from Ford, but GMAC does not disclose the dollar amount of rate support it receives from GM (GMAC does disclose the dollar amount of its other subvention programs). This difference makes GMAC's disclosures significantly less useful than FMC's and results in the appearance of the FMC program being significantly greater than the GMAC program. However, Moody's believes the programs are most likely similar in terms of their relative magnitude. 5. Moody's believes there is some confusion among investors regarding the nature of these programs and hope this Comment serves as a succinct primer on the subject.