- REUTERS/Rebecca Cook
- FCA announced that it will establish its own captive-finance arm.
- FCA is the only big carmaker without a captive.
- CEO Sergio Marchionne will retire in 2019 and wants to leave FCA is good shape to compete.
Fiat Chrysler Automobiles CEO Sergio Marchionne is set ot retire in 2019. But before he goes, Marchionne has one last puzzle-piece to bring to the Fiat-Chrysler merger, which began after the Chrysler bailout and bankruptcy in 2009.
In a statement last week, FCA said that it “intends to establish a captive financial services arm to provide US consumers with more options to finance vehicle purchases while supporting the company’s sales volumes and bolstering its earnings.”
FCA added that it sold more than two million vehicles in 2017 – but it did so without owning the financing.
The company’s leases and loans are handled by Santander, which operates Chrysler Credit; FCA is alone among big carmakers in not having a captive-finance arm.
Marchionne has periodically lamented this, but establishing a captive hasn’t been at the top of his to-do list. Instead, he’s been focused on eliminating as much debt as possible from FCA’s balance sheet before he departs.
“Given our strong financial performance and improving credit profile, we believe the time is right to pursue a US Finco strategy,” he said in a statement. “FCA will have adequate capital to fund the equity needed and expects to have the credit rating to make the Finco funding competitive.”
Captive financing can be something of a jewel in the crown of an automaker, providing a steadily profitable opportunity without the massive capital demands of the actual car manufacturing and marketing segment of the business.
For example, an automaker might make $5,000 on the sale of a well-optioned SUV – but it has to devote considerable capital to assembling and selling the vehicle.
Meanwhile, arranging the loan or lease is just a process of creating some debt against a capital reserve – and collecting the difference based on an interest-rate spread. Borrow the funds low, loan them out higher, secure the whole transaction with the asset value of the automobile, which is easy to define. Brilliant.
Initially, it looks like FCA might simply buy Chrysler Capital from Santander, effectively converting Santander’s loan book in one owned outright by FCA. But the company might also create a captive on its own. Regardless, Marchionne will now leave FCA as a complete, full-service organization, on par with its competition.
FCA shares have been big winners in the automotive space over the past 12 months, up 92%.