Optimism abounds at TD over Chrysler Financial deal

Toronto-Dominion Bank (TD-T) is buying Chrysler Financial, the lending division that once belonged to the Detroit auto maker, for $6.3 billion US. The cash deal, announced Tuesday morning, includes $5.9 billion of net assets and $400 million in goodwill.

Private equity player Cerberus Capital Management LP had put the auto leasing arm on the block this year after acquiring it in 2007 when it purchased 80 percent of the car company's operations.

TD said in a press release that the assets provide the bank with an opportunity to expand its lending operations in the U.S.

"This transaction takes our auto finance business to a new level," TD Chief Executive Officer Ed Clark said in a statement. "Chrysler Financial is a well-run business with the capacity for significantly higher returns over the next several years. This acquisition will allow us to leverage our lending expertise and financial strength to expand our presence in a large North American market with tremendous potential upside."

The Chrysler Financial assets will combine with TD's own auto-leasing businesses to create one of the top-five bank-owned auto lenders in North America. TD will not be issuing common equity to pay for the deal, the bank said.

Rumours of the deal had circulated in the market for the past few weeks and when reports emerged Monday that the transaction was close, TD's shares fell more than 2 percent, in part on concerns about the financial strength and the size of the loan portfolio.

"The transaction is smaller than the market feared since it appears the firm was more conservatively capitalized than we would have assumed," said CIBC analyst Rob Sedran. "The financial implications are modest with this being more about origination opportunity than the assets they are acquiring."

TD finances auto leasing in Canada and the U.S. through agreements with car dealers. Chrysler Financial has about one million customers. The deal also comes with technology to process about two million credit applications a year.

The deal will not impact earnings in 2011, but TD expects about $100 million in adjusted earnings in 2012. The bank said it believes it can achieve a return on invested capital of about 20 percent in the next three to four years.

The acquisition will have an impact on TD's Tier 1 capital of about 55-60 basis points on closing, and is expected to close in the second quarter, pending regulatory approvals. Chrysler Financial will be rebranded by spring 2011.

Mark Neporent, senior managing director at Cerberus said the deal, "ensures that the acquired businesses will be part of a strong and well-capitalized financial institution, which will help create sustainable jobs."

RBC analyst Andre-Philippe Hardy noted that Chrysler Financial's main book of loans has been in run-off, meaning the company was still working with customers who already had loans from years gone by but was not offering new loans.

As a result, Hardy said the value that TD brings to the business is access to capital and funding to allow Chrysler Financial to renew making loans, but "with an attractive cost base under the TD ownership."

He also said that TD will give the leasing operation a brand to operate under, since "Chrysler Financial is no longer affiliated with Chrysler and TD will seek to start making loans again, under the TD brand."

Cerberus bought 80 percent of Chrysler's operations in 2007. It relinquished the company's auto manufacturing division in 2009 when Chrysler filed for bankruptcy protection, but held on to the profitable leasing business. The $24 billion New York-based private equity fund acquired several loan portfolios amid the financial downturn, hoping to sell them off at a profit when the economy rebounded.

TD's move is the latest by a Canadian bank to acquire U.S. assets as well-capitalized Canadian lenders take advantage of buying opportunities presented by U.S. financial companies. Last week Bank of Montreal (BMO-T) acquired Milwaukee-based bank Marshall & Ilsley Corp. (MI-N) for $4.1-billion US worth of stock. That deal, which gave BMO a much bigger branch footprint in Wisconsin and other U.S. states, came with $52-billion in assets.

Clark told analysts on a conference call to discuss the deal that TD has a deposit-rich operation in the U.S. and the Chrysler Financial acquisition will allow the bank to grow its lending portfolio. The automotive finance sector is the second largest non-mortgage consumer asset class after credit cards.

TD is hoping to double the number of dealerships Chrysler Financial is currently offering leasing to in the U.S. to 5,000, spanning different makes of cars. The operations will focus on prime borrowers, as opposed to subprime car leases.

"This is an asset class that's performed pretty well," Clark told analysts. "People want to have cars - because if they don't have cars, they don't have jobs."

The bank is attempting to build a North American auto leasing business with this deal, and TD said it would welcome changes to the Canadian Bank Act that would allow banks to get into direct auto leasing in Canada.

Banks are not allowed to compete directly with car companies for auto leases in Canada, but do backstop leases offered by dealers. However, some car makers have recently indicated they would not be against Ottawa changing the rules to allow banks into the business in Canada.