Dealer credit quality remains concern in Ally floorplan ABS
Although monthly payment rates are improving, ongoing deterioration in dealer quality in Ally Financial’s second floorplan securitization of 2018 is raising concerns with ratings agencies.
In a presale report published Thursday for the $667.7 million Ally Master Owner Trust Series 2018-2, Moody’s Investors Service noted the shrinking composition of highest-rated General Motors and Fiat Chrysler LLC within the internal credit tiers of Ally’s inventory financing services.
According to Moody’s, that rate of dealers considered to have minimal risk – with profitable operations, positive cash flow and adequate credit – has fallen to 78% of the pool, compared with 81% last year and as high as 92% in 2012.
In addition, a small percentage of dealers had their internal credit rating migrate to the two weaker tiers for Ally. Such ratings would make the dealers’ accounts ineligible to be added to the pool during the deal’s three-year revolving period, but from “time to time” Ally will permit low-rated dealers to remain in the trust to pay down credit lines, according to Fitch Ratings.
Weaker performance or declining financial metrics usually cause an internal downgrade, which was a factor in 2017 as some dealers struggled with bloated inventories of unsold passenger vehicles – which in turn lowered the trust’s monthly payment rate (MPR) figures.
MPR is a key ABS performance measure of floorplan note performance, providing the percentage of outstanding receivables that dealers pay from floorplan-financed vehicles sold in the retail channel. The trust is usually paid off in full by the dealer after a vehicle is sold, so the rate provides insight into a client dealer’s ability to manage inventory flow.
In 2018, the monthly payment rates have increased slightly to a three-month average of 34.8% in March, compared to the 2017 monthly average of 33%.
In the new transaction, Ally’s 31st overall, it will issue five classes of notes of which only one, the senior, $500 million Class A tranche, is being rated. Both from Fitch and Moody’s expect to assign triple-A ratings.
The senior notes benefit from 25.5% credit enhancement (unchanged from recent Ally floorplan securitizations) and are collateralized by $11.9 billion of inventory balances on 1,428 dealer accounts.
Moody’s has reduced its stress loss estimate on the deal to 21% from 22% in February, while Fitch has a base-case loss of 18.8% that is also slightly decreased due to applying a lower haircut to the floorplan recovery rates.
Ally maintains a $31.2 billion managed portfolio of floorplan financing for 4,857 dealers, with 65.5% the account with GM franchised dealerships – many of them legacy relationships through Ally’s former standing as an exclusive captive-finance lender when it was formerly known as GMAC.
Another 26.1% are with Fiat Chrysler dealers.