Toronto-Dominion Bank To Buy Chrysler Financial

By Chris Haak

Toronto-Dominion, the second-largest bank in Canada based on deposits, announced today that it has acquired Chrysler Financial.  Chrysler Financial has had a number of ups and downs over the past few years, but the entity is clearly ending its life on an “up” note.  Toronto-Dominion is better known in the US as TD Bank.

Previously the captive finance arm for Chrysler and its various brands, Cerberus purchased the lender along with Chrysler’s automotive operations in 2007.  Partially due to Chrysler’s struggles, and partially due to the financial crisis, Chrysler Financial was undergoing major struggles.  As Chrysler exited bankruptcy, Chrysler Financial lost its status as Chrysler’s captive-finance arm, with that role moving to GMAC instead under the government’s direction.  Chrysler Financial executives declined to accept TARP funds to shore up the company’s balance sheet, and it looked like the firm would be liquidated.  It was generating little new business and seemed to have dim prospects for the future.

Chrysler Financial had still accepted a $4 billion bridge loan in January 2009,and as Chrysler LLC slid into bankruptcy, the loan went into default, and the US Treasury entered into an agreement with Cerberus that gave the government the greater of $1.375 billion from Chrysler Financial, or 40 percent of the company.  Had the government only recovered the $1.375 billion from Cerberus for Chrysler Financial, it would have only recovered 34 cents on the dollar.  In its darkest days, Chrysler Financial was not writing new loans and was only servicing existing ones.

Then, as the new-car market recovered somewhat, the used-car market recovered even more dramatically, particularly in terms of residual values.  Used-car prices rebounded this year, and more than made up for the decline in residuals experienced in prior years.  Suddenly, the leases and loans on Chrysler Financial’s books weren’t as worthless as they had seemed to be during the crisis.  In May 2010, Cerberus paid the Treasury $1.9 billion to retire its obligation, which effectively set the value of all of Chrysler Financial at $4.75 billion ($1.9 billion is 40 percent of $4.75 billion).

Business Week notes that, based on the $6.3 billion price that TD is paying for Chrysler Financial, the Lazarus-like lender’s value increased by almost 33 percent since May, when the price was set with Cerberus’ payment to the Treasury.  The higher price is certainly good news for Cerberus, which – per Automotive News, stands to recoup an impressive 90 percent of its initial Chrysler investment following the unloading of Chrysler Financial.  Considering that there was basically a depression in the auto industry, that two of the big three US-based automakers needed bailouts and Chapter 11 in order to survive, it’s almost a staggeringly high sum.

Of course, the higher price little more than a half a year after the Treasury cashed out of Chrysler Financial will doubtless lead to criticism that the government moved too quickly to unload its stake.  Depending on one’s perspective, this is either a perfect example of why government should not be in the bailout business in the first place, or a perfect example of how political pressure to get out of the bailout business resulted in leaving at least $620 million on the table.  To the latter comment, an anonymous Treasury official told BW that

the Treasury made the [May] deal because it had a willing buyer and wanted to exit the business, said a person familiar with direct knowledge of the transaction, who declined to be identified because the considerations aren’t public. The agency wants to resolve bailout holdings quickly rather than trying to time the market, the person said.

For more color, a Treasury spokesperson went into a bit more detail for BW.

“We’re not a private-equity fund,” said Tim Massad, the Treasury’s acting assistant secretary for financial stability, about the agency’s management of TARP in an interview last month. “We believe that promoting financial stability means we should exit as soon as we can.”

As for the question of what drove the higher price, BW says that it’s not just the aforementioned higher resale values.  Instead, perhaps Cerberus can thank its former GMAC (now Ally Bank) partner, General Motors, for setting the market rate for auto lenders.  You will recall that in July 2010, GM agreed to purchase AmeriCredit for $3.5 billion (or 46 percent above its book value of $2.4 billion) to re-establish a true captive finance arm.

That’s our most recent auto finance comp, and that was a very expensive transaction for GM,” said Adam Steer, an analyst at research firm CreditSights Inc. in New York, in an interview Dec. 8. “That could potentially be impacting values.”

Toronto-Dominion’s $6.3 billion cash purchase of Chrysler Financial includes $5.9 billion in assets and about $400 million in goodwill, Canada’s second-biggest bank said yesterday in a statement.

At any rate, the deal helps TD continue is southward march into US markets, and immediately cements the Canadian bank as one of the top-five bank-owned auto lenders in the US.  TD expects the transaction to be earnings-neutral in 2011, and accretive to earnings in 2012 and going forward.

With most automakers possessing their own captive-finance arms (Honda, Toyota, Ford, and others), Chrysler may find itself at a competitive disadvantage if other automakers can lean on their captive-finance organizations to subsidize lending, relax credit-quality standards to enable sales to subprime buyers, and promote attractive lease offers.  It will be interesting to see how this side of the business plays out over the coming months and years, because access to inexpensive credit is critical for moving the metal, and this business is all about the monthly sales results.