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Dealer Floorplan ABS Resilient Despite Recession and Automaker Bankruptcies

September 29, 2009

Auto dealer floorplan asset-backed securities (ABS) continue to perform and remain resilient despite the recession and the bankruptcies of two domestic automakers, said ratings firm DBRS.

The pressure weighing against transaction performance peaked immediately following the bankruptcy filings of Chrysler LLC and General Motors Corporation (GM) in April and June, respectively.

“The immediate expectation from many market participants was for auto dealers to be decimated by the potential disruption in new vehicle production and consumer aversion to purchasing vehicles from bankrupt manufacturers, and for these circumstances to cause a dramatic slowing of payment rates on floorplan ABS collateral and spur rating downgrades,” DBRS analysts said. “Thus far, this situation has not materialized, in part due to the robustness of dealer floorplan transaction structures that seek to protect investors through the rapid amortization of the ABS notes.”

For example, at the time of the GM filing, DBRS placed the outstanding ratings of the Superior Wholesale Inventory Financing Trust XI (SWIFT XI) under review because of the rapid amortization event triggered by the manufacturer's bankruptcy filing, and its potentially negative impact on the performance of the collateral backing the floorplan transaction.

When DBRS made the rating action it believed the bankruptcy filing would not cause the trust’s payment rate to result in a ratings downgrade. Rather, DBRS believed that the rapid amortization event and the historically consistent payment rate on the underlying wholesale loans, would result in a pay down of the transaction notes before credit enhancement would be extinguished. In fact, the SWIFT XI transaction paid down in full on September 14, 2009, which is nearly 2.5 years ahead of schedule. 

In another example, the DaimlerChrysler Master Owner Trust 2006-1 dealer floorplan transaction paid down the Class A notes in full on their most recent distribution date, which came five months after Chrysler LLC’s bankruptcy triggered early amortization and two months prior to the original expected maturity.

DBRS also said the “Cash for Clunkers” program provide more support for the historical strength of payment rates in dealer floorplan trusts by causing extraordinarily high dealer sales volumes and payment rates. Despite the program being discontinued, its benefits to the dealer floorplan sector are evident. Not only have payment rates increased, but the levels of previously financed inventory remaining on dealer lots are at all-time low, the ratings firm said. 

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