The coronavirus pandemic could put strain on Santander Consumer USA’s financing alliance with Fiat Chrysler Automobiles, according to filings with the Securities and Exchange Commission.
SCUSA’s ability to potentially meet Chrysler Capital penetration rate goals under its private-label finance agreement with FCA could be “adversely” affected due to the COVID-19 crisis, according to SEC filings. Last summer, the companies had finally smoothed the speed bumps that hindered the Chrysler Capital partnership for years.
Since the coronavirus outbreak, the subprime lender has experienced a “significant decline” in origination volume exacerbated by FCA’s announcement last month to suspend production of new vehicles in North America, SCUSA noted in the April 10 filing. As a result, there is reduced availability of new vehicles for FCA dealers to sell after shelter-in-place orders are lifted and consumer demand bounces back.
The COVID-19 economic crisis is bearing down on the new vehicle SAAR for 2020, which has plummeted 37% to 10.7 million units, according to TruCar ALG’s latest forecast. FCA has already posted a 10% year-over-year decline in vehicle sales for the first quarter, clocking in at 446,768 units. The automaker also announced last week that it would extend plant closures to May 4 in the U.S. and Canada. Production was originally slated to resume tomorrow, April 14.
To that end, FCA could terminate its contract with SCUSA if Chrysler Capital penetration rate goals, which were renegotiated in July 2019, are not met. The new target rate is not public information, but the companies “revised some of those metrics to provide SCUSA and FCA flexibility to execute,” a company spokeswoman confirmed with Auto Finance News.
There is no baseline dollar amount associated with SCUSA and FCA’s agreement.
Given the current economic environment, consumers are unwilling to make new-car purchases, thereby limiting the opportunity for Chrysler Capital to originate new loans or leases. Most recently, SCUSA reported a Chrysler Capital penetration rate of 34% on 2.2 million Fiat Chrysler vehicles sold at yearend 2019, its highest since the agreement was inked in 2013.
In addition, SCUSA is expecting an increase in credit losses, according to the SEC filing. Unemployment has soared to record highs in the last three weeks. SCUSA is required to shoulder all the credit losses for loans and leases originated under Chrysler Capital banner.
FCA has a 10-year private label financing agreement that requires SCUSA, under its subsidiary Chrysler Capital, to meet certain loan and lease penetration goals based on the total number of new Chrysler vehicles sold or leased in a year.
After five years of unmet penetration rate goals from 2013-2018, SCUSA salvaged its agreement with FCA via a $60 million payout in exchange for adjusted performance metrics, exclusivity commitments and payment provisions.
