Chrysler Forms Auto-Financing Unit With Santander

Chrysler Group LLC, the automaker controlled by Fiat SpA, agreed to make a U.S. unit of Banco Santander SA its preferred provider for auto loans, replacing Ally Financial Inc.

Santander Consumer USA Inc. will form Chrysler Capital to provide customers with financing to purchase and lease vehicles, Auburn Hills, Michigan-based Chrysler said yesterday in a statement. Chrysler Capital, which will begin operating May 1, will also provide dealers with wholesale loans for buying vehicles from the manufacturer.

Sergio Marchionne, chief executive officer of Chrysler and Fiat, sought a new lending partner in the U.S. after Chrysler said in April 2012 that it would let an agreement with Ally expire this April. Chrysler, the No. 3 U.S. automaker, generates more than $25 billion in auto loans annually, people familiar with the matter said a year ago.

“We expect Chrysler Capital to help Chrysler Group continue its sales growth by offering consumers the most competitive and innovative retail purchase and lease financing,” Peter Grady, Chrysler Group’s vice president of network development and fleet, said in the statement.

Santander, Spain’s biggest bank, sold a stake in its U.S. auto-loans unit to a partnership of private-equity firms Warburg Pincus LLC, KKR & Co. and Centerbridge Capital Partners LLC in 2011’s fourth quarter. Sponsor Auto Finance Holding Series, a company owned by funds affiliated with the firms, bought a 25 percent stake for $1 billion, data compiled by Bloomberg show.

Chrysler Capital

Chrysler said its agreement with Santander is for 10 years. Santander will create a separate business unit as part of the deal that also will finance for dealership construction, real estate, working capital and revolving lines of credit. Santander will provide Chrysler with a nonrefundable upfront payment and a quarterly share of revenue, according to the statement, which doesn’t give specifics.

Chrysler’s agreement with Ally required the automaker to notify the Detroit-based lender a year in advance if it intended to let their deal expire. In March 2012, a month before Chrysler had to decide, Ally was one of four lenders that failed to meet minimum capital standards in Federal Reserve stress tests.

The Federal Reserve’s tests evaluated the nation’s biggest lenders on how they would fare in a severe economic slump. Residential Capital LLC, Ally’s mortgage unit that generated losses tied to subprime loans, filed for bankruptcy last May.

Ally Stabilizing

Ally, 74 percent owned by the U.S., now appears to be gaining a more-stable footing as it seeks to repay the government for its $17.2 billion rescue. Ally on Feb. 5 reported $1.45 billion net income for the fourth quarter, compared with a loss of $206 million a year earlier. Income at Ally’s automotive finance unit rose to $371 million from $285 million a year earlier, aided by a 60 percent rise in lease originations.

“Ally has been a good business partner for Chrysler and has forged strong relationships with many of our dealers,” Grady said in the statement. “Chrysler Group expects that Ally will continue to do a good job for our dealers and retail customers beyond the April 30 expiration of our current agreement.”

Subsidized-rate, or subvented, loans from GM and Chrysler dealers were 20 percent of Ally’s originations last year, down from 58 percent in 2009, according to a slideshow presentation. The lender is diversifying by expanding its used and leasing business, which totaled 46 percent of originations last year, up from 14 percent in 2009.

“We’ve known the subvented loan contracts with the manufacturers were set to expire and we’ve successfully positioned the company to thrive whether we have a contract or not,” Jeffrey Brown, Ally’s senior executive vice president for finance and corporate planning, said on a conference call.

Risks Shared

Santander will get the right to specified minimum percentages of Chrysler’s subsidized-rate financing programs, the automaker said yesterday in a regulatory filing. In return, the lender will commit to certain approval and penetration rates.

Santander will shoulder the risk of losses on loans covered by the agreement and the two parties will share in any residual gains or losses with respect to consumer leases, according to Chrysler’s filing.

Separately, Volkswagen AG said yesterday that it expanded its U.S. auto-loan unit’s main customer-service office to increase the workforce 28 percent as part of a push by Europe’s biggest carmaker to reach the top spot in global vehicle sales.

The company spent $10 million upgrading the VW Credit Inc. branch in Libertyville, Illinois, north of Chicago, and plans to create 150 jobs there through 2018, according to a statement from Wolfsburg, Germany-based Volkswagen.

(Updates with risk sharing in the 14th paragraph.)
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