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Ford limits revolvers on next 2 floorplan ABS to 3 & 5 Years

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Ford Motor Credit's next two offerings of bonds backed by lines of credit to dealerships have much shorter terms.

The captive finance lender for Ford Motor Co. is simultaneously issuing two series of notes totaling a combined $1.15 billion for its Ford Credit Floorplan Master Owner Trust A. The collateral for the $863.4 million 2019-1 series will revolve over a three-year period and the collateral for the $287.8 million 2019-2 series will revolve over a five-year period. During that time, the proceeds from repaid principal can be used to acquire new collateral.

By comparison, Ford's previous "floorplan" financing securitization, completed in December, featured a 10-year period during which the collateral revolved. It was the longest revolving period in any floorplan deal, according to Fitch. Before that, no floorplan deal issued by Ford Motor Credit had a revolving period longer than seven years.

Extended revolving periods in securitizations can introduce the risk of unforeseen credit-quality deterioration, underscored in the auto industry in which consumer trends and vehicle demand can shift dramatically, affecting dealer performance.

The 10-year period in the 2018-4 transaction resulted in much higher loss level projections of 27.73%, compared to previous floorplan transactions issued by the master trust that ranged from 16.9%-19%, in Fitch’s analysis. The 2019-1 and 2019-2 series have a blended loss assumption of 17%.

That is a slightly higher loss rate compared to previous deals outside of Ford's 2018-4 series, because of what Fitch says was a slightly lighter concentration of financially stronger dealers with multiple franchise locations.

In addition to higher loss factors, extended revolvers delay amortization, meaning floorplan investors do not receive principal payments during the window that the trust can purchase eligible loan assets.

(The 2019-1 and 2019-2 series can also purchase a limited amount of dealer loan accounts that don’t meet eligibility standards, so long as the trust provides additional credit enhancement via incremental boosts in subordination.)

The two series of 2019 notes will be secured by $21.1 billion in balances among 3,137 dealer accounts in the trust, with an average account balance of $6.7 million per dealer. No dealer will amount to more than 2% of the eligible pool, according to the Fitch and Moody’s Investors Service presale reports.

The capital structure of the Series 2019-1 notes includes a $750 million Class A series of notes with preliminary triple-A ratings from Fitch and Moody’s. The Series 2019-2 pool has a $250 million Class A tranche, also triple-A. Both receive 24.35% credit enhancement.

The new issuance is the 31st series to date since the trust was established in 2001 to provide new- and used-car financing to Ford-franchised dealers (including single-Ford dealers and Ford dealers with multi-brand franchise agreements). FMC’s portfolio also includes exposure to the AutoNation network of dealers to 5% of the pool balance.

The trust has 15 outstanding series, according to Fitch.

The trust has yet to sustain a loss since being founded, with strong financial performance of its dealer network: According to Moody's, 89% of Ford's dealers have a top Group 1 tier risk rating (among four tiers) from Ford.

The monthly payment rates of dealers has been stable, according to Fitch, indicating dealers are adequately managing inventories. the average MPR in 2018 was 40.4%, consistent with the 40.5% in 2017.

In dealer floorplan arrangements, captive lenders such as FMC provide a line of credit to dealers that finances the wholesale invoice price of new vehicles delivered from Ford Motor Co., or the acquisition costs of used vehicles that are put up for sale on dealer lots.

When a vehicle is sold, generally the obligation owed the manufacturer is paid down in full. Ford Motor Co.’s financial assistance to dealers also includes guarantees and repurchase agreements on unsold inventory.

Barclays Capital, Credit Agricole and Lloyds are underwriting the deal.

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