| AMERICREDIT CORP ITEM 1A RISK FACTORS Dependence on Credit Facilities |
| We depend on various credit facilities with financial institutions to finance our purchase of contracts pending securitization |
| At September 8, 2006, we had five separate credit facilities that have available borrowing capacity of dlra4cmam050dtta0 million, including: (i) a credit facility providing up to dlra1cmam950dtta0 million of receivables financing, of which dlra150dtta0 million matures in November 2006 and the remaining dlra1cmam800dtta0 million matures in November 2008; (ii) a medium term note facility providing dlra650dtta0 million of receivables financing which matures in October 2007; 12 ______________________________________________________________________ [38]Table of Contents (iii) a repurchase facility providing up to dlra600dtta0 million through February 2007 and declining to dlra500dtta0 million through the August 2007 maturity, for the financing of finance receivables repurchased from securitization Trusts upon exercise of the cleanup call option; (iv) a near prime facility to fund higher credit quality receivables, providing up to dlra400dtta0 million of receivables financing which matures in July 2007; and (v) a BVAC credit facility to fund BVAC originated receivables providing up to dlra450dtta0 million of receivables financing which matures in September 2007 |
| We cannot guarantee that any of these financing resources will continue to be available beyond the current maturity dates at reasonable terms or at all |
| The availability of these financing sources depends, in part, on factors outside of our control, including regulatory capital treatment for unfunded bank lines of credit and the availability of bank liquidity in general |
| If we are unable to extend or replace these facilities or arrange new credit facilities or other types of interim financing, we will have to curtail contract purchasing activities, which would have a material adverse effect on our financial position and results of operations |
| Our credit facilities contain various covenants requiring certain minimum financial ratios, asset quality, and portfolio performance ratios (portfolio net loss, delinquency and repossession ratios, and pool level cumulative net loss ratios) as well as limits on deferment levels |
| Failure to meet any of these covenants could result in an event of default under these agreements |
| If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements or restrict our ability to obtain additional borrowings under these agreements |
| As of June 30, 2006, our credit facilities were in compliance with all covenants |
| Dependence on Securitization Program |
| Since December 1994, we have relied upon our ability to transfer receivables to securitization Trusts and sell securities in the asset-backed securities market to generate cash proceeds for repayment of credit facilities and to purchase additional receivables |
| Accordingly, adverse changes in our asset-backed securities program or in the asset-backed securities market for automobile receivables in general could materially adversely affect our ability to purchase and securitize loans on a timely basis and upon terms acceptable to us |
| Any adverse change or delay would have a material adverse effect on our financial position, liquidity and results of operations |
| We will continue to require the execution of securitization transactions in order to fund our future liquidity needs |
| There can be no assurance that funding will be available to us through these sources or, if available, that it will be on terms acceptable to us |
| If these sources of funding are not available to us on a regular basis for any reason, including the occurrence of events of default, deterioration in loss experience on the receivables, breach of financial covenants or portfolio and pool performance measures, disruption of the asset-backed market or otherwise, we will be required to revise the scale of our business, including the possible discontinuation of loan origination activities, which would have a material adverse effect on our ability to achieve our business and financial objectives |
| Dependence on Financial Guaranty Insurance |
| To date, all but six of our securitizations in the United States have utilized financial guaranty insurance policies provided by various monoline insurance providers in order to achieve AAA/Aaa ratings on the insured securities issued in the securitization transactions |
| These ratings reduce the costs of securitizations relative to alternative forms of financing available to us and enhance the marketability of these transactions to investors in asset-backed securities |
| However, the financial guaranty insurance providers are not required to insure future securitizations sponsored by us, and there can be no assurance that they will continue to do so or that future securitizations sponsored by us will be similarly rated |
| Our insurance providers’ willingness to insure our future securitizations is subject to many factors beyond our control, including concentrations of risk with any given insurance provider, the insurance providers’ own rating considerations, their ability to cede this risk to reinsurers and the performance of the portion of our portfolio for 13 ______________________________________________________________________ [39]Table of Contents which the insurer has provided insurance |
| Alternatively, in lieu of relying on a financial guaranty insurance policy, in six of our securitizations in the United States, we have sold or retained subordinate asset-backed securities in order to provide credit enhancement for the senior asset-backed securities |
| A downgrading of any of our insurance providers’ credit ratings or the inability to structure alternative credit enhancements, such as senior subordinated transactions, for our securitization program could result in higher interest costs for future securitizations sponsored by us and larger initial and/or target credit enhancement requirements |
| The absence of a financial guaranty insurance policy may also impair the marketability of our securitizations |
| These events could have a material adverse effect on the cost and availability of capital to finance contract purchases which in turn could have a material adverse effect on our financial position, liquidity and results of operations |
| Our ability to make payments on or to refinance our indebtedness and to fund our operations and planned capital expenditures depends on our ability to generate cash in the future |
| This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| Our primary cash requirements include the funding of: (i) contract purchases pending their securitization; (ii) credit enhancement requirements in connection with the securitization of the receivables; (iii) interest and principal payments under our credit facilities and other indebtedness; (iv) fees and expenses incurred in connection with the securitization and servicing of receivables; (v) ongoing operating expenses; (vi) income tax payments; and (vii) capital expenditures |
| Additionally, we have been using cash to fund our stock repurchase program since April 2004; to the extent we were unable to generate sufficient cash to fund the aforementioned items, it is anticipated that stock repurchases would be curtailed or discontinued |
| We require substantial amounts of cash to fund our contract purchase and securitization activities |
| Although we must fund certain credit enhancement requirements upon the closing of a securitization, we typically receive the cash representing excess cash flows and return of credit enhancement deposits over the actual life of the receivables securitized |
| Assuming that origination volume ranges from dlra7dtta2 billion to dlra7dtta8 billion in fiscal 2007 and the initial credit enhancement requirement for our securitization transactions remains at 9dtta5prca (the level for the most recent securitization completed in July 2006), we would require dlra684dtta0 million to dlra741dtta0 million in cash or liquidity to fund initial credit enhancement in fiscal 2007 |
| The initial credit enhancement requirement could increase in future securitizations, which would result in an increased requirement for cash on our part |
| We also incur transaction costs in connection with a securitization transaction |
| Accordingly, our strategy of securitizing substantially all of our newly purchased receivables will require significant amounts of cash |
| Our primary sources of future liquidity are expected to be: (i) excess cash flows received from securitization Trusts; (ii) interest and principal payments on loans not yet securitized; (iii) servicing fees; (iv) borrowings under our credit facilities or proceeds from securitization transactions; and (v) further issuances of debt or equity securities |
| Because we expect to continue to require substantial amounts of cash for the foreseeable future, we anticipate that we will require the execution of additional securitization transactions and may choose to enter into debt or equity financings |
| The type, timing and terms of financing selected by us will be dependent upon our cash needs, the availability of other financing sources and the prevailing conditions in the financial markets |
| There can be no assurance that funding will be available to us through these sources or, if available, that the funding will be on acceptable terms |
| If we are unable to execute securitization transactions on a regular basis, we would not have sufficient funds to finance new loan originations and, in such event, we would be required to revise the scale of our business, including possible discontinuation of loan origination activities, which would have a material adverse effect on our ability to achieve our business and financial objectives |
| We currently have a substantial amount of outstanding indebtedness |
| Our ability to make payments of principal or interest on, or to refinance, our indebtedness will depend on our future operating performance, including the performance of receivables transferred to securitization Trusts, and our ability to enter into additional securitization transactions as well as debt and equity financings, which, to a certain extent, is subject to economic, financial, competitive, regulatory and other factors beyond our control |
| If we are unable to generate sufficient cash flows in the future to service our debt, we may be required to refinance all or a portion of our existing debt or to obtain additional financing |
| There can be no assurance that any refinancings will be possible or that any additional financing could be obtained on acceptable terms |
| The inability to refinance our existing debt or to obtain additional financing would have a material adverse effect on our financial position, liquidity and results of operations |
| The degree to which we are leveraged creates risks including: (i) we may be unable to satisfy our obligations under our outstanding indebtedness; (ii) we may find it more difficult to fund future credit enhancement requirements, operating costs, capital expenditures, stock repurchases, acquisitions, or general corporate purposes; (iii) we may have to dedicate a substantial portion of our cash resources to the payments on our outstanding indebtedness, thereby reducing the funds available for operations and future business opportunities; and (iv) we may be vulnerable to adverse general economic and industry conditions |
| Our credit facilities require us to comply with certain financial ratios and covenants |
| Additionally, our credit facilities have minimum asset quality maintenance requirements |
| These restrictions may interfere with our ability to obtain financing or to engage in other necessary or desirable business activities |
| As of June 30, 2006, we were in compliance with all financial and portfolio performance covenants on our credit facilities and securitization transactions |
| If we cannot comply with the requirements in our credit facilities, then the lenders may increase our borrowing costs or require us to repay immediately all of the outstanding debt |
| If our debt payments were accelerated, our assets might not be sufficient to fully repay the debt |
| These lenders may require us to use all of our available cash to repay our debt, foreclose upon their collateral or prevent us from making payments to other creditors on certain portions of our outstanding debt |
| These events may also result in a default under our convertible senior note indenture |
| In such case, our financial condition, liquidity and results of operations would suffer |
| Our results of operations, financial condition and liquidity depend, to a material extent, on the performance of loans in our portfolio |
| Obligors under contracts acquired or originated by us may default during the term of their loan |
| We bear the full risk of losses resulting from defaults |
| In the event of a default, the collateral value of the financed vehicle usually does not cover the outstanding loan balance and costs of recovery |
| We maintain an allowance for loan losses on loans held on our balance sheet which reflects management’s estimates of inherent losses for these loans |
| If the allowance is inadequate, we would recognize the losses in excess of that allowance as an expense and results of operations would be adversely affected |
| A material adjustment to our allowance for loan losses and the corresponding decrease in earnings could limit our ability to enter into future securitizations and other financings, thus impairing our ability to finance our business |
| We are required to deposit substantial amounts of the cash flows generated by our interests in securitizations sponsored by us to satisfy targeted credit enhancement requirements |
| An increase in defaults or prepayments would reduce the cash flows generated by our interests in securitization transactions lengthening the period required to build targeted credit enhancement levels in the securitization trusts |
| Distributions of cash from the securitizations to us would be delayed and the ultimate amount of cash distributable to us would be less, which 15 ______________________________________________________________________ [41]Table of Contents would have an adverse effect on our liquidity |
| The targeted credit enhancement levels in future securitizations could also be increased, further impacting our liquidity |
| Portfolio Performance—Negative Impact on Cash Flows |
| Generally, the form of agreements we enter into with our financial guaranty insurance providers in connection with securitization transactions contain specified limits on portfolio performance ratios (delinquency, cumulative default and cumulative net loss triggers) on the receivables included in each securitization Trust |
| If, at any measurement date, a portfolio performance ratio with respect to any Trust were to exceed the specified limits, provisions of the credit enhancement agreement would automatically increase the level of credit enhancement requirements for that Trust, if a waiver was not obtained |
| During the period in which the specified portfolio performance ratio was exceeded, excess cash flows, if any, from the Trust would be used to fund the increased credit enhancement levels instead of being distributed to us, which would have an adverse effect on our cash flows and liquidity |
| Prior to October 2002, the financial guaranty insurance policies for all of our insured securitization transactions were provided by Financial Security Assurance, Inc |
| The restricted cash account for each securitization Trust insured as part of the group of securitizations covered by a financial guaranty insurance policy provided by FSA (hereinafter referred to as the “FSA Program”) was cross-collateralized to the restricted cash accounts established in connection with our other securitization Trusts in the FSA Program, such that excess cash flows from an FSA Program securitization that had already met its credit enhancement requirement could be used to fund target credit enhancement requirements with respect to FSA Program securitizations in which specified portfolio performance ratios had been exceeded, rather than being distributed to us |
| We previously breached cumulative net loss performance triggers on certain of our FSA Program securitizations causing a postponement of substantially all of the cash otherwise distributable to us from the FSA Program securitizations as this cash was used to fund increased credit enhancement requirements on FSA Program securitizations |
| As a result of constrained liquidity, we adopted a revised operating plan in February 2003 which included a decrease in our targeted loan volume and a reduction of operating expenses |
| As of September 8, 2006, there are two remaining FSA Program securitizations outstanding, each of which has reached the higher level of credit enhancement required as a result of the breach of portfolio performance ratios |
| Generally, our securitization transactions insured by financial guaranty insurance providers, including FSA, from October 2002 through August 2005 are cross-collateralized to a limited extent |
| In the event of a shortfall in the original target credit enhancement requirement for any of these securitization Trusts after a certain period of time, excess cash flows from other transactions insured by the same insurance provider would be used to satisfy the shortfall amount |
| In one of our securitization transactions, if a secured party receives a notice of a rating agency review for downgrade or if there is a downgrade of any class of notes (without taking into consideration the presence of the financial guaranty insurance policy) excess cash flows from other securitization transactions insured by the same insurance provider would be utilized to satisfy any increased target credit enhancement requirements |
| Our securitization transactions insured by financial guaranty insurance policies after August 2005 did not contain any cross-collateralization provisions |
| Right to Terminate Normal Servicing |
| The agreements that we enter into with our financial guaranty insurance providers in connection with securitization transactions contain additional specified targeted portfolio performance ratios (delinquency, cumulative default and cumulative net loss triggers) that are higher than the limits referred to in the preceding risk factor |
| If, at any measurement date, the targeted portfolio performance ratios with respect to any insured Trust were to exceed these additional levels, provisions of the agreements permit the financial guaranty insurance providers to terminate our servicing rights to the receivables sold to that Trust |
| In addition, the servicing agreements on certain insured securitization Trusts are cross-defaulted so that a default under one servicing agreement would allow the financial guaranty insurance provider to terminate our servicing rights under all servicing agreements for securitization Trusts in which they issued a financial guaranty insurance policy |
| Additionally, if these higher targeted portfolio performance levels were exceeded, the financial guaranty insurance providers may elect to retain all excess cash generated by other securitization transactions insured by them as additional credit enhancement |
| This, in turn, could result in defaults under our other 16 ______________________________________________________________________ [42]Table of Contents securitizations and other material indebtedness |
| Although we have never exceeded these additional targeted portfolio performance ratios, and do not anticipate violating any event of default triggers for our securitizations, there can be no assurance that our servicing rights with respect to the automobile receivables in such Trusts or any other Trusts will not be terminated if (i) such targeted portfolio performance ratios are breached, (ii) we breach our obligations under the servicing agreements, (iii) the financial guaranty insurance providers are required to make payments under a policy, or (iv) certain bankruptcy or insolvency events were to occur |
| As of June 30, 2006, no such servicing right termination events have occurred with respect to any of the Trusts formed by us |
| The termination of any or all of our servicing rights would have a material adverse effect on our financial position, liquidity and results of operations |
| Implementation of Business Strategy |
| Our financial position, liquidity and results of operations depend on management’s ability to execute our business strategy |
| Key factors involved in the execution of the business strategy include achieving the desired loan origination volume, continued and successful use of proprietary scoring models for credit risk assessment and risk-based pricing, the use of effective credit risk management techniques and servicing strategies, implementation of effective loan servicing and collection practices, continued investment in technology to support operating efficiency and continued access to significant funding and liquidity sources |
| Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity and results of operations |
| Sub-prime borrowers are associated with higher-than-average delinquency and default rates |
| While we believe that we effectively manage these risks with our proprietary credit scoring system, risk-based loan pricing and other underwriting policies and collection methods, no assurance can be given that these criteria or methods will be effective in the future |
| In the event that we underestimate the default risk or under-price contracts that we purchase, our financial position, liquidity and results of operations would be adversely affected, possibly to a material degree |
| We are subject to changes in general economic conditions that are beyond our control |
| During periods of economic slowdown or recession, such as the United States and Canadian economies have at times experienced, delinquencies, defaults, repossessions and losses generally increase |
| These periods also may be accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default |
| Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales |
| Additionally, higher gasoline prices, unstable real estate values, reset of adjustable rate mortgages to higher interest rates or other factors that impact consumer confidence or disposable income could decrease consumer demand for automobiles as well as weaken collateral values on certain types of automobiles |
| Because we focus on sub-prime borrowers, the actual rates of delinquencies, defaults, repossessions and losses on these loans are higher than those experienced in the general automobile finance industry and could be more dramatically affected by a general economic downturn |
| In addition, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in our finance charge income |
| While we seek to manage the higher risk inherent in loans made to sub-prime borrowers through the underwriting criteria and collection methods we employ, no assurance can be given that these criteria or methods will afford adequate protection against these risks |
| Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could adversely affect our financial position, liquidity and results of operations and our ability to enter into future securitizations |
| Wholesale Auction Values |
| We sell repossessed automobiles at wholesale auction markets located throughout the United States and Canada |
| Auction proceeds from the sale of repossessed vehicles and other recoveries are usually not sufficient to cover the outstanding balance of the contract, and the resulting deficiency is charged off |
| Decreased auction proceeds resulting from the depressed prices at which used automobiles may be sold during periods of economic slowdown or recession will result in higher credit losses for us |
| Furthermore, 17 ______________________________________________________________________ [43]Table of Contents depressed wholesale prices for used automobiles may result from significant liquidations of rental or fleet inventories, and from increased volume of trade-ins due to promotional programs offered by new vehicle manufacturers |
| Additionally, higher gasoline prices may decrease the wholesale auction value of certain types of vehicles |
| Our net recoveries as a percentage of repossession charge-offs was 48prca in fiscal 2006, 43prca in fiscal 2005 and 41prca in fiscal 2004 |
| There can be no assurance that our recovery rates will remain at current levels |
| Interest Rates |
| Our profitability may be directly affected by the level of and fluctuations in interest rates, which affects the gross interest rate spread we earn on our receivables |
| As the level of interest rates increase, such as they have since 2003, our gross interest rate spread on new originations generally declines since the rates charged on the contracts originated or purchased from dealers are limited by market and competitive conditions, restricting our opportunity to pass on increased interest costs to the consumer |
| We believe that our profitability and liquidity could be adversely affected during any period of higher interest rates, possibly to a material degree |
| We monitor the interest rate environment and employ pre-funding in securitization transactions and other hedging strategies designed to mitigate the impact of increases in interest rates |
| We can provide no assurance, however, that pre-funding or other hedging strategies will mitigate the impact of increases in interest rates |
| Competition to hire and retain personnel possessing the skills and experience required by us could contribute to an increase in our employee turnover rate |
| High turnover or an inability to attract and retain qualified personnel could have an adverse effect on our delinquency, default and net loss rates, our ability to grow and, ultimately, our financial condition, results of operations and liquidity |
| Data Integrity |
| If third parties or our employees are able to penetrate our network security or otherwise misappropriate our customers’ personal information or loan information, or if we give third parties or our employees improper access to our customers’ personal information or loan information, we could be subject to liability |
| This liability could include identity theft or other similar fraud-related claims |
| This liability could also include claims for other misuses or losses of personal information, including for unauthorized marketing purposes |
| Other liabilities could include claims alleging misrepresentation or our privacy and data security practices |
| We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure online transmission of confidential consumer information |
| Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data |
| A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations |
| We may be required to expend capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches |
| Our security measures are designed to protect against security breaches, but our failure to prevent such security breaches could subject us to liability, decrease our profitability, and damage our reputation |
| Reference should be made to Item 1 |
| “Business—Regulation” for a discussion of regulatory risk factors |
| “Business—Competition” for a discussion of competitive risk factors |
| As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud, breach of contract and discriminatory treatment of credit applicants |
| Some litigation against us could take the form of class action complaints by consumers |
| As the assignee of finance contracts originated by dealers, we may also be named as a co-defendant in lawsuits filed by consumers principally against dealers |
| The relief requested by the plaintiffs varies 18 ______________________________________________________________________ [44]Table of Contents but can include requests for compensatory, statutory and punitive damages |
| We believe that we have taken prudent steps to address and mitigate the litigation risks associated with our business activities |
| However, any adverse resolution of litigation pending or threatened against us, including |