Post crisis dealer floorplan ABS deals have higher credit enhancement requirements than deals done before 2009.
This fact makes these structures robust, particularly at the senior level, according to a Barclays Capital report released today.
Floorplan finance consists of the secured extension of credit to a dealer to finance the purchase of inventory from a manufacturer. Most obtain this financing through the captive finance arm of the manufacturer, the report explained.
The primary risks to investors in dealer floorplan ABS are macroeconomic stress, the bankruptcy of the manufacturer, dealer, and/or finance company, and fraud. These risks are typically mitigated within the deal structure through credit enhancement.
According to Barclays, the higher credit enhancement in deals today relative to pre-crisis offerings and the bankruptcy-tested nature of dealer floorplan ABS structures increase the severity of the stresses (such as a decline in inventory pricing and increase in loss severity upon liquidation) that these transactions can withstand.
"In the subordinate space, valuation is extremely sensitive to inventory loss severity assumptions," analysts said in the report. "On the other hand, we find that the senior classes are, in general, well protected against all but the most severe stress scenario."
They added that they expect increasing dealer sales growth to spur new issuance in the sector. The rise will also be driven by refinancings from post-crisis transactions scheduled to mature in 2013 to 2015.