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Charting the Recovery

August 2010, F&I and Showroom - Feature

by Jim Bass - Also by this author

Is the financial situation really getting better? Is the outlook for the car business really improving? Funding to purchase contracts from dealerships is certainly available to finance companies, but has the crisis really passed? Well, it depends on whom you ask.

In June, attendees at the National Automotive Finance Association’s conference had the good fortune to hear Dan Berce, the CEO of AmeriCredit Corp., talk about the company’s last 18 months or so. AmeriCredit’s leaders have always been refreshingly forthcoming in disclosing the company’s financial situation to a greater degree than is required by the Securities and Exchange Commission (SEC), which is a good thing since the company still represents the bellwether of the nonprime auto finance industry.

Two statements really stood out to me as Berce ran through some of the company’s financial trials:

First, in order to survive the horrible state of the securitization crisis, AmeriCredit had to agree to sell 20 percent of the company at a price well below its book value. The SEC required that AmeriCredit’s board sign some sort of agreement that the company would be dissolved if the sale didn’t solve its issues. While that seems like a risky place to be and a gutsy action to take, AmeriCredit probably didn’t have any real choice given the equity requirement dictated by the terms of the company’s warehouse line-of-credit agreement and the equity support requirements needed to execute an asset-backed securities (ABS) transaction.

Second, when the company executed a sort of desperate securitization under the Term Asset-Backed Securities Loan Facility (TALF) in May 2009, the cost of funds for the A-rated tranche was about 15 percent. Thankfully, the most recent securitization, completed in May 2010 under the new equity structure, touted a cost of funds of less than 5 percent. So, yes, things have improved some.

However, prior to 2009, required overcollateralization to execute an ABS transaction was about 10 percent of the portfolio being financed. That requirement is now closer to 25 percent. Significantly higher equity also is required to get an ABS deal done. Leverage has been reduced significantly — maybe a plus in the grand scheme of things — but difficult for most finance companies to handle.

Environment for Banks No Better

The other major players currently in the nonprime finance market are depository institutions (i.e., banks) such as Wells Fargo, Chase Bank, and BB&T through its subsidiary, Regional Acceptance. Even within those institutions — which have virtually unlimited funds being furnished by depositors — the regulatory climate continues to be challenging for these institutions as the federal Office of the Comptroller of the Currency (OCC) seems predisposed to a hearty dislike for any credit level other than “prime.” The agency also has displayed a distinct prejudice against dealerships and the auto business in general.

During the first week of July, I heard a spokesman from JPMorgan Chase’s dealership capital loan segment say that the OCC is so prejudiced that the mere fact that a loan is in place for a dealership may be enough to get that loan classified. Basically, the concept of a dealership obtaining a capital loan without the personal guarantee of the owner or owners is a thing of the past.

Now, this news has nothing to do with the performance of existing loans. Loans made based upon collateral values of land, buildings, inventory, parts, etc., are becoming nonexistent. That is, there must be sufficient cash flow available — over and above the needs of the dealership’s operations — in order to obtain a new or renewed loan. The Chase spokesman even said that the renamed GMAC will soon find that its hands will also be tied, which, no doubt, is why General Motors is attempting to get a new GMAC started, as it seems that auto finance sources may need to be non-bank institutions due to the overzealousness of the OCC.

On another note, let’s say that a dealer principal decides he has had it with the trials and tribulations of the car business and the time has come to sell his successful business. Well, the potential buyer had better have plenty of his own money, because there is virtually no value given to blue sky — that is, the intrinsic value of the dealership over and above the depreciated and risk-graded value of the assets. Hence, most dealerships go unsold and a tired dealer principal and his family and/or senior management are forced to hold on for better days.

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