New York -- A rapid or disorderly bankruptcy by one or more of the U.S. auto manufacturers or their captive finance companies would likely result in negative rating actions on certain U.S. dealer floorplan ABS transactions, although the U.S. government’s $17.4 billion bailout announcement provides at least temporary relief and limits the likelihood of this event occurring in the near term, according to Fitch Ratings.
To date the performance of Fitch rated dealer floorplan ABS is within expectations with few signs of stress from the financial pressure being experienced at the manufacturer, captive finance company and dealership levels. The current precarious financial condition of the U.S. auto manufacturers, however, have raised questions among investors regarding the potential impact of a manufacturer bankruptcy on the performance of U.S. auto ABS transactions in general and dealer floorplan transactions in particular.
When analyzing dealer floorplan loan securitizations, Fitch has always assumed that the manufacturer files Chapter 11 and the following occur simultaneously: auto sales decline; numerous dealers default on their floorplan loans; and a large number of new and used vehicles are repossessed and auctioned as a result. The transaction structure is then stressed to determine if credit enhancement is sufficient to withstand vehicle value declines consistent with the proposed rating level.
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. 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.
If the likelihood of a disorderly bankruptcy increases, Fitch would place the dealer floorplan transactions on Rating Watch Negative which could be followed in quick succession with downgrades if there are any early signs that the performance of the transactions is outside of Fitch’s expectations. The magnitude of the downgrades will depend on the degree to which actual performance deviates from Fitch’s stress scenarios.
Fitch has had numerous conversations with the U.S. dealer floorplan ABS issuers over the past two months. Certain issuers have indicated that they are taking steps to reduce dealer credit lines and otherwise mitigate the transactions exposure to higher risk borrowers. While positive, it is unclear if these steps will be of sufficient benefit to offset the increase in bankruptcy risk. Fitch has requested additional information from the issuers which it will use to assess stress assumptions related to various bankruptcy scenarios. Fitch will review this information to determine if any rating actions are warranted.
Fitch currently rates approximately $12 billion in dealer floorplan ABS related to the US domestic auto manufacturers. These were issued by each of Ford’s, General Motors’s and Chrysler’s corresponding captive finance arms through nine separate issuances and include a combination of fixed and floating rate securities from seven trusts: Ford’s Ford Credit Floorplan Master Owner Trust (FCFMOT), GMAC’s Superior Wholesale Inventory Finance Trust VIII (SWIFT VIII), Superior Wholesale Inventory Finance Trust X (SWIFT X), Superior Wholesale Inventory Finance Trust XI (SWIFT XI), Superior Wholesale Inventory Financing Series 2007-AE-1, and SWIFT Master Auto Receivables Trust (SMART) and Chrysler’s Master Chrysler Financial Owner Trust.
