DETROIT -- The finance arm of General Motors on Tuesday said it will sell up to $55 billion in car loans to Bank of America over the next five years as part of a "landmark deal" to help secure future financing.
General Motors Acceptance Corp. has seen its borrowing costs increase sharply after its debt was downgraded to high-yield or "junk" status, along with GM's earlier this year, and the loan sales help provide access to ample liquidity.
"We are very pleased to enter into this landmark agreement with Bank of America," Sanjiv Khattri, the company's chief financial officer, said in a statement. "It allows GMAC to fulfill its strategic mission to finance more GM vehicles, without undue strain on the balance sheet."
In a joint statement, GMAC and Bank of America said an initial purchase of $5 billion of GMAC's retail automotive finance contracts had been agreed upon by the two parties.
In each of the agreement's five fiscal years, Bank of America will buy up to $10 billion of the contracts, the statement said. It added that GMAC would continue to service the contracts.
The agreement takes effect this month and ends in June 2010.
A GMAC spokeswoman said she was unable to offer immediate comment on the size of its car loan portfolio. Analyst David Healy said $55 billion was believed to represent "a big chunk" of the total, however.
"Since they're junk rated this is a different way of securitization," Healy told Reuters.
"It's the way they've been raising funds typically since the cut in ratings made standard debt financing too expensive," he said. "It's an extension of what they've been doing right along here."
GM shares rose 90 cents, or about 2.5 percent, to $36.77 in afternoon trading on the New York Stock Exchange, after paring earlier gains on news of the loan sales.
GMAC's bonds rose nearly 2 points after news. GMAC's 6.75 percent notes, due in 2014, rose to 94 cents on the dollar from 92.25 cents before the joint announcement.
Last week, GMAC reported second-quarter net income of $816 million compared with $846 million in the year-ago period.
It said lower income from financing operations were partially offset by increased earnings from mortgage and insurance operations.
GM, which alarmed Wall Street with a stunning $1.1 billion first-quarter loss, posted a $286 million loss in the second quarter. The industrial icon has been making a lot more money as a bank than as an automaker, and its core North American auto operations lost $1.2 billion in the second quarter.