‘Disorderly’ auto bankruptcy concerns addressed, 2009 auto forecasts made

by The City Wire staff ([email protected]) 71 views 

A Tuesday (Dec. 23) report from Fitch Ratings about possible downgrades for asset-based securities of U.S. auto dealer floorplans does not immediately concern area auto dealer Frank Hug.

The Fitch rating is complex, but the simple issue is this: Auto dealers get loans to buy the inventory on their lots, and the loan amount goes to auto makers. This loan structure on the numerous cars purchased for inventory is referred to as a “floorplan.” The banks and credit issuers within the auto manufacturers — GMAC, Ford Finance, for example — often package floorplans into an “asset backed security” that is then sold in the financial markets. It’s similar to how mortgages are packaged and resold.

The Fitch report released Tuesday suggests that its previous ratings on asset backed securities tied to floorplan financing have always assumed a more stable market. Fitch rates approximately $12 billion in dealer floorplan securities related to the U.S. auto makers.

“The orderliness of the bankruptcy is a key assumption in Fitch’s analysis as it limits the likelihood of catastrophic dealer bankruptcies and highly disorganized collateral liquidations,” Fitch wrote in the report.

Continuing, Fitch noted, “The fact that all three U.S. manufacturers and captive finance companies are experiencing such significant financial and operational difficulty could test the validity of this assumption particularly given the recessionary environment and the inability of dealers to obtain alternative financing because of credit market pressures.”

However, the federal government’s $17.4 billion bailout limits the chances of a disorderly bankruptcy occurring in the near term, according to Fitch.

Hug, with Hug Chevrolet in Charleston, said floorplan financing has not been immune from the negative pressures of the credit crisis, but he does not see signs of a “disorderly bankruptcy.”

At present, Hug said market forces are at work.

“We are seeing several dealership inventories liquidated regionally and nationwide with no effect on new vehicle inventory prices,” Hug explained. “(Auto) Manufacturer reduction in (first quarter 2009) production schedules will help that trend continue. That could change with more stress being placed if many dealers liquidated, as might be the case in a disorderly bankruptcy.”

Arkansas auto dealers are having a tough time. An Associated Press story reported that Dennis Jungmeyer, president of the Arkansas Automobile Dealers Association, said Arkansas likely will have lost about 30 dealerships by the end of June — more than a tenth of its dealers. He said each dealer closing represents about 35 jobs lost.

Jungmeyer said dealers in the Fort Smith area, where there have been numerous manufacturing job losses, are suffering considerably.

That suffering, if the folks at Edmunds.com are correct, could continue into 2009.

A Dec. 23 report from Edmunds.com predicts new light vehicle sales to decrease by almost five percent in 2009. In 2008, approximately 13.1 million new vehicles were sold, while almost 16.2 million new vehicles were sold in 2007, according to the report.

And for those curious about how the high and low gas prices of 2008 altered auto sales, Edmunds.com has some interesting data.

• Hybrid vehicle market share was 2.1 percent at the beginning of the year, peaked at 3.2 percent in April and fell to 2.2 percent in November.

• Compact car market share was 15.3 percent at the beginning of the year, reached 21.3 percent in June and declined to 16.1 percent in November.

• Large pick-up truck market share was 12.3 percent at the beginning of the year, dipped to 9.3 percent in May and climbed back to 13.8 percent in November.

• Midsize SUV market share was 15.3 percent at the beginning of the year, dropped to 11.8 percent in May and rose to 13.7 percent in November.

Other thoughts about the 2009 auto market from Edmunds.com includes:

• Factories will have extended shutdowns as automakers seek to match supply with expected minimal demand.

• Transaction prices of certain models might increase as automakers make significant cuts to production, causing decreases in supply.

• Government involvement as a result of the bailout will spur faster development of alternative fuel vehicles.

• Subcompact and compact cars will continue to be popular as consumers expect gas prices to fluctuate.

• The truck market will stay flat despite impressive new model introductions.

• “Concessions made by the unions as part of the federal bailout will make it a bit easier for automakers to reap the benefits of factory shutdowns,” said Michelle Krebs, Editor of Edmunds’ AutoObserver.com. “Automakers will no longer have to pay workers who are not working, and that quickly adds up to real savings.”