Strains are growing again in the US car finance market as a dramatic slide in used vehicle values and tightening credit conditions squeeze participants ranging from investors in auto loan-backed securities to finance companies and car buyers. The pressures were evident earlier this week when Ford Credit, Ford Motor's financing arm, reported a $294m second quarter loss, compared with a $112m profit a year earlier. Ford Credit wrote down its lease portfolio by $2.1bn and stepped up its loan-loss provisions.
Based on Ford's results, Himanshu Patel, analyst at JPMorgan, estimates that General Motors' second quarter earnings could take a $2.2bn hit, before tax, from impaired lease residual values at GMAC, the financial services group 49 per cent owned by the carmaker.Cerberus Capital Management owns the remaining 51 per cent of GMAC, plus an 80 per cent stake in Chrysler, which also has a captive vehicle financing arm.The slump in pick-up and sport-utility vehicle sales has forced financing companies to sell off-lease vehicles at prices below contracted residual values.
Wholesale used vehicle prices dropped by 7.4 per cent in the year to June, including a 3.3 per cent tumble in the past month alone, according to Adesa, a vehicle auction group. Prices for full-sized pick-ups and SUVs have slumped by a quarter over the past year. Other luxury vehicles also saw sizeable declines.Delinquency rates have also risen. "Conditions in the auto-finance market are not too good," said Scott Carstens, head of quality control and lending at Crescent Bank and Trust of New Orleans, a subprime lender.
Mr Carstens said that many traditional banks and finance companies had tightened their credit criteria, giving an opening to specialised subprime lenders that take more time to scrutinise individual applications.Chris Flanagan, head of ABS research at JPMorgan, said that concerns centred on the Detroit carmakers. "Other issuers have had pretty good success in the market," he said.
According to Mr Flanagan, auto loan related securitisations totalled $62bn for the full-year 2007 and issuance is running at $32bn so far this year. Recent issuers include Honda, Carmax and USAA, a financial services company that specialises in military personnel.Risk premiums, or spreads, in the ABS market have widened in the past month or so, but are well short of levels reached in March.
Rates on Ford Credit, GMAC and Chrysler ABS are 30-40 basis points higher than the overall market.Fitch Ratings said in a report earlier this month that lower recovery values on SUVs and pick-ups have led to greater losses on defaulted loans in many securities backed by auto loans.
These losses "will place negative pressure on the subordinate bonds of certain auto asset-backed securities transactions", Fitch said.However, John Bella, a Fitch analyst, said that recent ratings of auto-backed paper had taken account of more stressful market conditions, with the result that ratings had remained stable and, in some cases, even been upgraded.
Ford Credit said that it was dealing with more hostile business conditions by maintaining substantial cash balances, diversifying sources of funding and exploring new business arrangements.
Source: http://www.ft.com