by Marcie Belles
The auto market lately has been like a bad dream. Consumer confidence has plunged, and with it, vehicle sales and finance volume. In certain credit segments, potential car buyers can’t secure loans. And in the cases that they can, the amount financed has declined. On the dealer front, floorplan availability is being squeezed. So far, the government has instituted two programs meant to stabilize the financial markets: the Troubled Asset Relief Program (TARP) and the Term Asset-Backed Securities Loan Facility (TALF).
TARP funds have been doled out to financial institutions nationwide to bolster their cash positions, and $17.4 billion of the $700 billion total was granted as a bridge loan to Chrysler LLC and General Motors Corp. TALF, meanwhile, creates a facility to finance issuance of non-mortgage asset-backed paper. The program is meant to get liquidity flowing back into the auto loan, student loan and credit card markets. In December, TALF was expanded to include dealer floorplans, a win for the industry, analysts say.
Even with those programs, though, recovery in the auto finance space will be slow and uncertain. So far, some banks that have received TARP funds have not used them to spur financing, says dealer consultant Greg Goebel, adding: “If the banks are borrowing the money and not putting it in play, then what good is it?” The loans to Chrysler and GM are meant for day-to-day operations, not for finance-related activities. “Any kind of money you stick into GM and Chrysler is paying their bills — paying to keep the lights on,” says Jesse Toprak, executive director of industry analysis at Edmunds.com. “It’s not increasing sales.”
Still, the move might jumpstart sales to a degree, contends Lincoln Merrihew, senior vice president of automotive for research firm TNS North America. The bailout “restores some confidence among consumers to buy Big Three vehicles, which would lead to more volume of financing,” he says. The equation has been complicated lately, because lenders across the credit spectrum have tightened underwriting guidelines, making it difficult for consumers to finance vehicle purchases. Sales of Honda Civics and Toyota Corollas, which normally do well in this type of environment, are down, Toprak points out. “Most consumer buyers of those vehicles are in the near-prime range,” with credit scores in the 620-to-700 range, he says, adding that by some estimates, near-prime loans comprise 40 percent of originations. And while the subprime sector has remained “very predictable,” Goebel says, “A lot of prime customers have failed.” In some cases, even prime customers can’t qualify for loans because they owe more on their loans than their vehicles are worth, he says.
Dealers, too, are facing funding pressures. “I can’t tell you how many dealers have told me that they have lost their floorplan or were given notice that they may lose their floorplan,” says Goebel, who communicates with 4,500 dealers per month. “No floorplan, and you’re out of business.” Another consideration is that the market difficulties have spread. “The problem is even affecting Toyota and Honda buyers,” Toprak says. “It’s not really a domesticonly problem.” Toyota Motor Corp., for instance, announced late last year that it expected to report a $1.7 billion operating loss — its first-ever — for the year ending March 31.
Banks, too, will feel the effects. “Banks who thought they could make [the lost volume] up with the imports, will see that they can’t,” Merrihew said. What does all this mean? For one thing, some floorplan providers have softened their response to dealers having trouble making payments. “Many floorplanners are looking past egregious sins, like those who are out of trust by $250,000, because they have other dealers out of trust by $1 million,” Goebel said. Also, further government intervention may come in the form of funds to the captives. “The government is trying to provide assistance to the need,” says Efraim Levy, automotive equity analyst at Standard & Poor’s. GMAC LLC, for example, received approval last December to become a bank-holding company, a change that makes it eligible to access TARP funds.
Also, by the end of 2009, sales should start to improve, says Erich Merkle, lead auto analyst at Crowe Horwath LLP. Hislong-term target: 15.5 million vehicles per year. “Eventually they’ll get back to that trend,” he says. For Merkle, sometimes the smoother the environment, the less optimistic he becomes. “I actually get a little more confident when things are bad,” he says. “When vehicle sales are at 17 million, I get skittish.”
Under the Gun
Chrysler LLC and General Motors Corp. have until March 31 to formulate their plans to return to viability, or risk having their billion-dollar loans recalled. In late December, the government earmarked $17.4 billion of loans to the two automakers. The funds, doled out from the Troubled Asset Relief Program, are contingent on the companies showing they are financially viable and competitive by the end of March. Ford Motor Co., the third of the Domestic Three automakers, told Congress it could operate without a bailout, at least for the near term.
The capital infusion came after the Big Three chief executives were grilled on Capitol Hill about labor, management and dealer network costs, their product lineups, balance sheets and debt structures. GM and Chrysler are negotiating with the United Auto Workers union to score wage concessions that will enable them to operate more efficiently.
Ultimately, recovery of the ailing automakers hinges on a rebound in vehicle sales volume, which plunged 18 percent in 2008. Skittish consumers have shied away from plunking down thousands of dollars for new vehicles. The slowdown in purchases will ultimately create pent-up demand later this year, by which time consumers will be better positioned to assume the additional credit.
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Though modestly down from June, average wholesale usedvehicle prices in July stayed above $10,000 for the second month in a row and were up on a year-over-year basis for the third month in a row. While the Cash for Clunkers government program grabbed headlines and supported previously dormant new-vehicle traffic and sales, retail used-vehicle sales were up on a year-over-year basis for the fourth month in a row. And, lest folks think that C4C is leading to a “bubble” in used-car prices, they should remember that firming usedvehicle prices resulting from low trade-in supply and strong used-car demand are conditions that have been in place for the entire year.
