Tuesday, June 30, 2009

US auto dealers in pain

The auto dealers in the US have been hit hard in this recession - possibly harder than most businesses. They are pressured from two sides. On one hand the blunt approach the US manufacturers (and their new shareholders - the US government) have taken with respect to dealer closings and other drastic measures have devastated the industry. The video below of NADA Chairman John McEleney testimony before the U.S. Senate gives a good overview.

On the other hand the banking industry has all but abandoned floor plan (inventory) financing (as well as working capital loans). Floor plan financing is a lifeline of a dealer because the inventory is so expensive (it's not like running a diner.) There are two reasons the banks have been so reluctant to provide dealer financing. One is that banks (shaken by 08) had little guidance as to how the auto industry will shake out in the US until very recently. Until there was some certainty, they simply put in blunt policies not to provide floor plan financing at all. See this video from earlier this year:

The other issue for banks is that in the past they were able to finance pools of floor plan loans via the ABS markets. They could securitize the loans, sell the senior tranche or sell the whole thing and keep some of the fees. This way they had little balance sheet utilization and got great returns on capital. Well that market is gone and the only buyer of AAA ABS paper these days is the US government. In fact the Fed doesn't actually buy the paper but takes it in as collateral and lends banks or investors money - all via TALF. From the Fed:
Floorplan loans will include revolving lines of credit to finance dealer inventories. Eligible floorplan ABS issued by a revolving (or master) trust must be issued to refinance existing floorplan ABS maturing in 2009 and must be issued in amounts no greater than the amount of the maturing ABS. Eligible floorplan ABS may also be issued out of an existing or newly established master trust in which all or substantially all of the underlying exposures were originated on or after January 1, 2009. Eligible floorplan ABS must have an average life of no more than five years.

TALF for floor plans financing has been really slow to get going. The hope is that non-bank investors will show up to the party and kick start the market. The Fed is there with leverage and there is money to be made. Once we have some stability with respect to the manufacturers, the financing will be there. But for now it's rough times for dealers and many will not survive.

Note: thanks to one of our readers for shedding some light on this issue.