Dealers may not have the financial stability to repay floorplan credit lines as the COVID-19 economic crisis collapse vehicle sales and dealer revenue, Fitch Ratings announced this afternoon.
As a result, the performance of dealer floorplan asset-backed securities has been revised to negative.
The outlook change reflects the $20.2 billion of notes outstanding Fitch rated issued from Ally Bank, BMW Financial Services, Ford Motor Credit, GM Financial, Mercedes-Benz Financial Services, Navistar Financial, Nissan Motor Acceptance Corp. and Volvo Financial Services.
Since the coronavirus outbreak has placed the U.S. under lockdown, dealership foot traffic has been reduced to zero. Despite dealers and lenders pushing for digital car buying, online sales are unlikely to make any “material” impact on sales or revenues, Fitch noted.
Overall, Fitch’s net dealer default levels for AAA rated bonds ranges from 15%-25%, more than 10 times the peak historical dealer default levels for most platforms. The lack of consumer demand for new vehicles is not the only issue for dealers; operational challenges have complicated purchasing and selling of used vehicles, too, with most wholesale auctions closed.
Moreover, if the coronavirus is not contained by the next one to two months, then Fitch expects “sales, revenues, dealer liquidity and overall financial health to suffer materially and gradually force dealers into bankruptcy.”
While all dealers face “heightened risk” from the pandemic, Fitch noted, larger public dealer groups, including AutoNation, Group 1 Automotive and Penske Automotive Group, are in a relatively stronger position given their balance sheet structures and available liquidity.
It is the smaller, more vulnerable dealerships that face greater short-term threats to their businesses, specifically dealers with one or two locations that are thinly capitalized with low levels of liquidity or cash on hand to weather the current crisis.
OEMs and captives have been offering plenty of relief options for dealers, but Fitch notes that payment deferrals or incentive programs are not expected to offset the massive decline in overall sales in the short term. However, the recent OEM factory closures and production cuts could be a positive for dealers, who can now focus solely on selling existing inventory and paying down their dealer floorplan lines.
