|
||||
|
|
||||
|
|
Captive Finance7/31/09 - When it comes to captive finance, the central ambiguity is "Who is captive to whom?"That's a major headache for industrial giants like General Electric and Ford Motor -- and for Washington. Captive finance arms historically had a fairly simple mission: Help customers purchase the industrial parent's goods and services. Since the parent was usually a market-leading American corporation, the captive finance arm could piggy-back off that to secure low cost funding, enticing more customers, providing further cash-flows for the industrial parent. Then captive finance broke loose. Some companies, notably GE, diversified into areas like property and credit cards. One credit crunch later, GE's stock price has been captured by its overextended finance business. Some companies used captive finance aggressively to funnel product to consumers to keep factories humming. General Motors' financing arm GMAC, for example, saw the share of its North American retail contracts and leases using incentives rise from 63% in 2004 to 79% in 2008. With industrial credit ratings damaged, some wonder if the captive finance model is broken altogether. Securitization markets are subdued, GE has leant on government guarantees, and Ford Motor Credit's latest bond issue looks set to carry a yield of 10.875%. Even if banks were not weak themselves already, they will not fulfill the role of captive finance. Return on assets in these businesses ranged between 1% and 3% for much of the past decade. While smaller, more focused captive finance arms will rebalance after the go-go years, foreign competitors with stronger balance sheets will muscle in. For Washington, it presents a dilemma between the need to tighten regulatory screws while offering consumers and businesses all the help they can to get them spending again. |
|
||