GMAC Offers New Data on Lease Trust

In a new disclosure included in its 2001 annual report, General Motors Acceptance Corp., General Motors' (GM Quote - Cramer on GM - Stock Picks) finance company, said it earned $650 million of pretax income from an off-balance sheet entity set up to buy car leases from GM franchised dealers.

The entity, named Central Originating Lease Trust, or COLT, was disclosed Monday in a 10-K filing of GMAC's 2001 financials with the Securities and Exchange Commission. COLT deserves closer scrutiny because of its sizable impact on GMAC earnings. In particular, the structure may have been used to help bring forward income on car leases, currently a difficult business for all auto financers.

GMAC said it couldn't make anyone available for comment about COLT on Monday, though this column agreed to follow up with an executive on Tuesday if one is made available. TheStreet.com recently did a special report on GM and GMAC. GM stock rose 43 cents Monday to $61.14, which is 70% above its 52-week low.

Because Enron's collapse was partially based on toxic deals with off balance sheet entities that were poorly disclosed, many companies have rushed out details of their unconsolidated structures to reassure investors that they have nothing similar. While very few firms have revealed anything like Enron's partnerships, the extra disclosure has given interesting insight into how some companies use off balance sheet entities to goose earnings.

GM stock has been on a tear recently as car sales have performed better than expected. However, to a certain extent, these robust sales have occurred because GMAC offers zero-cost financing and other incentives to potential buyers of GM cars. Because of these tactics, investors are keen to know how sustainable the incentives are. This depends, of course, on GMAC's profitability. And any sign that GMAC is being aggressive in recognizing earnings would be viewed negatively.

Enter COLT. According to the 10-K, it buys vehicles and related leases from GM dealers. It raises the money to buy these leases by selling debt notes to GMAC that are backed by the leases. The 10-K says GMAC recognized pretax income of $450 million on these secured notes in 2001, up 17% from the 2000 total. The filing says it either sells or holds onto these notes.

However, critically, it doesn't state how much of the income came from sales. Selling the notes essentially brings forward income that would be recognized over the term of the lease. Sometimes finance companies have been too aggressive in booking gains and have had to book losses later, although there is no indication that is the case with these leases.

GMAC also made $201 million of origination and servicing fees on COLT's leases in 2001. For 2001, GMAC reported pretax income of $2.8 billion.

The disclosure on COLT is oddly truncated: It says GMAC enters into "swap agreements" with COLT and that the accounting for the swaps is described in note 17 of the 10-K. However, note 17 doesn't mention COLT.