Cerberus Finds Luster in Detroit
In Chrysler Deal, Private-Equity Firm
Becomes Nation's Top Auto Lender;
'Growth Possibilities'?
By GREGORY ZUCKERMAN, SERENA NG and DANA CIMILLUCA
May 15, 2007
With its acquisition of Chrysler, Cerberus Capital Management isn't just becoming a force in Detroit. It's also becoming a force on Wall Street, with a stable of financial institutions that make it by far the biggest auto lender in the nation and a broader financial power around the globe.
As part of Cerberus's acquisition of an 80.1% stake in Chrysler Group from DaimlerChrysler AG, the private-equity firm will be getting the auto maker's lending arm, Chrysler Financial. Cerberus already owns 51% of GMAC Financial Services, the former financing arm of General Motors Corp., a stake it acquired last year.
With GMAC and Chrysler Finance under one roof, Cerberus will have approximately 11% market share in auto loans, nearly twice as large as its nearest competitor, Ford Motor Credit, and well ahead of U.S. banks, according to data from Experian Automotive. That could lead to cost savings and operating synergies, says Mark Oline, an analyst at Fitch Ratings.
Like GE Capital, the financing arm of General Electric Co., Cerberus has figured out that the financing business can be a rich vein even in struggling industries. Throughout the '90s, Cerberus quietly built up a middle-market lending portfolio at a time when many banks were abandoning these customers. Since then, Cerberus has spread its net over a far larger pool of borrowers both at home and abroad. In the process, it began picking off profitable niches globally.
Most recently, while many investors are writing off the auto-making business, Cerberus has tapped into a gold mine at both GM and Chrysler.
Car finance is "a very good business," says Efraim Levy, an auto analyst at Standard & Poor's Equity Research. "You take low-cost money and you lend it at a high rate. And then once you make a transaction and generate a fee from it, you can start the transaction over again and make another fee" by bundling car loans into securities sold to investors.
According to GMAC's annual report, its auto financing net income last year was $1.17 billion, or 7.8% of its total automotive financing revenue.
Private-equity firms have become increasingly aggressive buyers of other financial institutions in the past few years. One recent example: the deal to buy student-loan powerhouse Sallie Mae by JC Flowers & Co., another private-equity firm.
None have been more aggressive than Cerberus. Auto lending becomes the centerpiece of an even larger empire of financial assets that is quickly coming to rival some of the bigger financial institutions in the world.
The firm's interests range from Aegis Mortgage, a Houston mortgage company, to EntreCap, a Shelton, Conn., leasing company, to a collection of big banks in Japan, Austria and Israel. Success on some of these deals, such as the initial public offering last year of its Aozora Bank, gives Cerberus executives confidence it can make finance-lending deals work.
Chrysler Financial's book value -- its assets minus its liabilities -- is about $5.5 billion. That would make it a little more than a third the size of GMAC, which had a book value of $14.3 billion at the end of last year. When combined, that makes it a third of the size of GE Capital, before even accounting for Cerberus's many other financial holdings. GE Capital's book value is $54.1 billion.
Chrysler Financial is likely to fit into the broader ambitions of Cerberus. "We see numerous growth possibilities for Chrysler Financial, such as sectors like insurance and possibly consumer or commercial finance," says Mark Neporent, Cerberus's senior managing director and chief operating officer.
Cerberus is expected to keep GMAC and Chrysler Financial separate for the time being. It took the private-equity firm nine months to carve GMAC out of General Motors. If it was to put Chrysler Financial together with GMAC, it would have to find a way to separate the lending business from Chrysler's manufacturing business. Such separations are tricky because manufacturing and distribution and the financing of autos are generally intertwined.
Either way, GMAC could become a model for Chrysler Financial. GMAC, which deals in mortgage, consumer and commercial lending, does only about half of its business in car financing. Executives say Chrysler Financial will provide Cerberus with an attractive platform to pitch other kinds of loans or even insurance products.
GMAC's credit rating fell from investment grade to "junk" two years ago after GM was downgraded because of its mounting problems at the time. When Cerberus purchased a 51% stake in the finance company last year, it said it wanted to reduce GMAC's ties to GM's loss-making auto business and bring GMAC's rating back to investment grade.
That hasn't happened so far, in part because GMAC's mortgage-finance unit, Residential Capital Corp., recently posted large losses due to problems with its subprime home-lending business and a slower housing market.
Cerberus has also been better than many of its peers in lowering the risk of the deals it does. GM recently wrote GMAC a check for about $1 billion to compensate for Rescap's poor performance.
Cerberus recently replaced some of Rescap's top executives with individuals that have extensive mortgage-banking experience. Rescap's new CEO, Jim Jones, previously headed another Cerberus investment, Aegis Mortgage Corp., and also worked at Wells Fargo & Co. and Bank of America Corp.
In Chrysler Deal, Private-Equity Firm
Becomes Nation's Top Auto Lender;
'Growth Possibilities'?
By GREGORY ZUCKERMAN, SERENA NG and DANA CIMILLUCA
May 15, 2007
With its acquisition of Chrysler, Cerberus Capital Management isn't just becoming a force in Detroit. It's also becoming a force on Wall Street, with a stable of financial institutions that make it by far the biggest auto lender in the nation and a broader financial power around the globe.
As part of Cerberus's acquisition of an 80.1% stake in Chrysler Group from DaimlerChrysler AG, the private-equity firm will be getting the auto maker's lending arm, Chrysler Financial. Cerberus already owns 51% of GMAC Financial Services, the former financing arm of General Motors Corp., a stake it acquired last year.
With GMAC and Chrysler Finance under one roof, Cerberus will have approximately 11% market share in auto loans, nearly twice as large as its nearest competitor, Ford Motor Credit, and well ahead of U.S. banks, according to data from Experian Automotive. That could lead to cost savings and operating synergies, says Mark Oline, an analyst at Fitch Ratings.
Like GE Capital, the financing arm of General Electric Co., Cerberus has figured out that the financing business can be a rich vein even in struggling industries. Throughout the '90s, Cerberus quietly built up a middle-market lending portfolio at a time when many banks were abandoning these customers. Since then, Cerberus has spread its net over a far larger pool of borrowers both at home and abroad. In the process, it began picking off profitable niches globally.
Most recently, while many investors are writing off the auto-making business, Cerberus has tapped into a gold mine at both GM and Chrysler.
Car finance is "a very good business," says Efraim Levy, an auto analyst at Standard & Poor's Equity Research. "You take low-cost money and you lend it at a high rate. And then once you make a transaction and generate a fee from it, you can start the transaction over again and make another fee" by bundling car loans into securities sold to investors.
According to GMAC's annual report, its auto financing net income last year was $1.17 billion, or 7.8% of its total automotive financing revenue.
Private-equity firms have become increasingly aggressive buyers of other financial institutions in the past few years. One recent example: the deal to buy student-loan powerhouse Sallie Mae by JC Flowers & Co., another private-equity firm.
None have been more aggressive than Cerberus. Auto lending becomes the centerpiece of an even larger empire of financial assets that is quickly coming to rival some of the bigger financial institutions in the world.
The firm's interests range from Aegis Mortgage, a Houston mortgage company, to EntreCap, a Shelton, Conn., leasing company, to a collection of big banks in Japan, Austria and Israel. Success on some of these deals, such as the initial public offering last year of its Aozora Bank, gives Cerberus executives confidence it can make finance-lending deals work.
Chrysler Financial's book value -- its assets minus its liabilities -- is about $5.5 billion. That would make it a little more than a third the size of GMAC, which had a book value of $14.3 billion at the end of last year. When combined, that makes it a third of the size of GE Capital, before even accounting for Cerberus's many other financial holdings. GE Capital's book value is $54.1 billion.
Chrysler Financial is likely to fit into the broader ambitions of Cerberus. "We see numerous growth possibilities for Chrysler Financial, such as sectors like insurance and possibly consumer or commercial finance," says Mark Neporent, Cerberus's senior managing director and chief operating officer.
Cerberus is expected to keep GMAC and Chrysler Financial separate for the time being. It took the private-equity firm nine months to carve GMAC out of General Motors. If it was to put Chrysler Financial together with GMAC, it would have to find a way to separate the lending business from Chrysler's manufacturing business. Such separations are tricky because manufacturing and distribution and the financing of autos are generally intertwined.
Either way, GMAC could become a model for Chrysler Financial. GMAC, which deals in mortgage, consumer and commercial lending, does only about half of its business in car financing. Executives say Chrysler Financial will provide Cerberus with an attractive platform to pitch other kinds of loans or even insurance products.
GMAC's credit rating fell from investment grade to "junk" two years ago after GM was downgraded because of its mounting problems at the time. When Cerberus purchased a 51% stake in the finance company last year, it said it wanted to reduce GMAC's ties to GM's loss-making auto business and bring GMAC's rating back to investment grade.
That hasn't happened so far, in part because GMAC's mortgage-finance unit, Residential Capital Corp., recently posted large losses due to problems with its subprime home-lending business and a slower housing market.
Cerberus has also been better than many of its peers in lowering the risk of the deals it does. GM recently wrote GMAC a check for about $1 billion to compensate for Rescap's poor performance.
Cerberus recently replaced some of Rescap's top executives with individuals that have extensive mortgage-banking experience. Rescap's new CEO, Jim Jones, previously headed another Cerberus investment, Aegis Mortgage Corp., and also worked at Wells Fargo & Co. and Bank of America Corp.
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