Despite staving off an immediate failure of one of the Detroit Big Three auto dealers with $17.4 billion from the Troubled Asset Relief Program (TARP), doubt remains over these firms' long-term viability.
Bankruptcy concerns have put increased pressure on dealer floorplan ABS, which weighs heavily on the health of auto manufacturers and their dealer networks.
Last month, Moody's Investors Service cut the ratings of certain Chrysler Financial auto floorplan deals. In December, Fitch Ratings said that a rapid or disorderly bankruptcy by one or more of the U.S. auto manufacturers or their finance companies would likely result in negative rating actions on certain U.S. dealer floorplan ABS transactions.
With all three U.S. manufacturers and captive finance companies experiencing significant financial and operational stress, there is an increased likelihood of "catastrophic dealer bankruptcies and disorganized collateral liquidations," Fitch said. The recessionary environment and the lack of alternative financing for dealers because of credit market pressures further heighten the risk, the rating agency said.
Fitch currently rates approximately $12 billion in dealer floorplan ABS related to the U.S. domestic auto manufacturers. These were issued by each of Ford Motor Co.'s, General Motors's and Chrysler's captive finance arms through nine separate issuances. These deals also include a combination of fixed- and floating-rate securities from seven trusts.
Bankruptcy risks pose the greatest threat to auto floorplan securitizations, which have historically benefited from relatively low losses, according to market experts.
If there is a bankruptcy at the manufacturer or finance company level, performance across each critical variable (payment rates and new draws, and charge-off rates) will be negatively impacted, said Chris O'Connell, senior vice president in the structured finance group at DBRS. Although, when it comes to actuarial data and manufacturer or finance companies in bankruptcy, there is a lack of historical data in the sector, O'Connell said.
Indeed, there are very few instances of examples where manufacturers have gotten themselves into real problems, he pointed out. Most recently SsangYong Motor Co., South Korea's fifth largest auto manufacturer was placed in a court receivership in lieu of bankruptcy after it was not able to restructure. Prior to this, White Motor Co., which became insolvent in the 1980s, and Daewoo Motor Co., which ran into trouble in 2000 after the Asian financial crisis, were among the only other examples of failed auto manufacturers, O'Connell said.
Pulling the Triggers
Floorplan loans are typically revolving lines of credit used by auto dealers to purchase vehicles from the manufacturers. The loans are paid back when the cars are sold. Meanwhile, dealers also pay monthly interest on the loans. Typically, dealers are advanced 100% of the invoice amount for new vehicles and up to 100% of the third-party wholesale value for used vehicles, according to Barclays Capital.
These deals also contain early amortization triggers, which would typically send the deal into unwind mode.
A bankruptcy of the manufacturer or finance company is a likely cause of early amortization, Barclays analysts said, as is the breaching of a monthly payment trigger.
Indeed, a drop in the payment rates will push deals closer to early amortization, said Katie Reeves, director of securitization research at Deutsche Bank Securities.
With the market slow to adjust production to demand, payment rates have slowed over the past year because of the drop in car sales, Barclays analysts said in a recent report.
With consumer spending low, car dealers are losing money on flipping new cars. Deals need enough profit built into the equation so those losses don't impact investors, said an auto analyst.
Loss expectations for auto floorplan securitizations vary from deal to deal. All else being equal, trusts with larger reserve accounts provide better protection for the senior bonds than trusts with subordination, Barclays said. This is because these trusts have higher cash balances to make up for any shortfalls, the analysts said.
However, the extent of losses is somewhat dependent on what the government does, and whether that, in turn, allows key players to avoid bankruptcy, Reeves said.
Unemployment and consumer confidence are also key factors to watch for, O'Connell said. Last week, The Conference Board's consumer confidence index dropped to an all-time low of 37.7 from 38.6 in December.
Furthermore, increasingly tight credit conditions, according to a consumer ABS analyst, have made it harder for dealerships to obtain floorplan financing, which, like the rest of the ABS market, means fewer deals to come.
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