President Barack Obama took hold of the automotive industry on Monday by saying no to restructuring proposals from General Motors Corp. and Chrysler.
Obama also demanded new concessions for long-term federal aid and broached the possibility of a quick bankruptcy for the beleaguered auto companies.
The administration has said yes to offering working capital for a specific period of time to GM (60 days) and Chrysler (30 days), as these automotive firms are still working on their respective restructuring plans.
But, Obama implied that a structured bankruptcy process might be the path of least resistance for these firms so that they get rid of old liabilities.
Bank of America Securities/Merill Lynch's equity research team for the auto industry thinks that the probability of GM actually avoiding bankruptcy has lessened significantly. However, the decision to backstop warranties and publicly explain that the firm is allowed to operate in Chapter 11 and successfully emerge could partly mitigate the fear that a bankruptcy filing can cause, the equity analysts said.
BofA/Merrill ABS analysts argued that the administrations warranty program should support vehicle prices and, thus, recovery rates on repossessed vehicles as well as those returned at lease termination.
The program might also help maintain an important revenue stream for related franchised dealers, according to Merrill. This is granting that the third-party administrator for the program utilizes them for repair work.
BofA/Merrill ABS analysts cited the National Automotive Dealer Association as saying that service and parts represents about 12% of an average dealers total sales. Utilizing franchised dealers should also lessen customer concerns about the location of repair centers.
The program is targeted at consumers, although expansion to fleet sales (such as daily rental cars companies) could make sense, as they account for roughly 28% of GMs U.S. vehicle sales. The administration said that the program is not intended to slow the necessary restructuring as proven by the administration indicating that overcapacity of domestic franchise dealers is still an issue, BofA/Merrill said.
According to the BofA/Merrill ABS analysts, the administrations position on GM, Chrysler as well as the general auto industry raises key questions for ABS market participants.
They expect that the finance company of a restructured manufacturer would remain viable, considering that the administration views the value of credit in the vehicle sale process (e.g., confirmed support for the Term ABS Loan Facility).
Nonetheless, the manufacturer's bankruptcy, even in a structured process, would raise concerns regarding the potential impact on the related finance company, such as the effect of less financing volumes for consumers as well as dealers and support programs/services for off-lease vehicles and dealer inventories.
Another issue is the ability to maintain servicing standards. Analysts think that the servicing operations are scalable businesses and many functions could be outsourced.
Additionally, ABS buyers retain the right to transfer servicing under certain conditions, even though a bankruptcy judge might look to block the decision. Analysts assume that the treatment of dealers would be taken into account in the event of a structured bankruptcy process. This would reduce some of the uncertainty as manufacturers shrink dealer capacity.
GMAC and Chrysler Financial are still effectively performing the servicing functions required under their respective securitization programs, BofA/Merrill ABS analysts said.
Meanwhile, Fitch released a report saying that inspite of the poor economic fundamentals and issues in the auto industry, the prime annualized net losses (ANL) posted a 7% monthly dip in February, according to Fitch Ratings. The seasonal patterns and improving wholesale vehicle values supported performance in February, according to Fitch Managing Director John Bella.
"Tax refunds and rebates will aid performance in the next couple months," he said. "However, auto ABS still faces steep hurdles as the economy sheds jobs, consumer fundamentals remain poor, and concerns surrounding the health of domestic auto manufacturers fester."
ANL on prime auto ABS were 2.07% in February. The index was 56% higher compared with that in February 2008, providing evidence that factors driving loss rates have not subsided for the most part. Prime delinquencies were at 0.87% in February, unchanged over March, and 16% above levels a year ago.
Wholesale vehicle values bounced back in 2009 after dropping to record low levels in late 2008. According to Fitch, factors such as new vehicle supply cuts and consumers opting for cheaper used vehicles, boosted used vehicle values by nearly 8% since October 2008. At a minimum, this should result in the strengthening of recovery rates in the coming months and thus lessen the loss severity, and ultimately, loss rates in the short term, Fitch said.
