Loan- and lease-backed volume resumed in mid-April after the auto securitization market ground to a halt in March, but floorplan transactions have largely remained at a standstill.
Before COVID-19 took root in the U.S., NextGear Financial issued a $437 million transaction, much like it had done in March 2019. But for the six months that followed, the floorplan ABS market remained silent — until last week, when GM Financial rolled out a $650 million transaction slated to close Sept. 16. Previous issuers Ally Financial, BMW Financial Services, Ford Motor Credit, Hyundai Capital America, Mercedes-Benz Financial Services and Nissan Motor Acceptance Corp. have yet to securitize floorplan loans this year.
The ABS slowdown has taken its toll. Whereas combined auto loan and lease ABS volume is off 11% at $62.6 billion year to date, floorplan securitization volume has plunged 80% to $1.1 billion, according to data from J.P. Morgan.
In the early days of COVID, the outlook for the floorplan ABS market was tenuous. Fitch Ratings and S&P Global Ratings downgraded some dealer floorplan asset-backed securities on the expectation that dealers might lack the financial stability to repay their loans amid showroom closures and stalled vehicle sales. Floorplan loan repayment hinges on the proceeds from vehicle sales, so if sales dry up, dealers struggle to pay their floorplan providers. The monthly payment rate (MPR) — an indicator of floorplan securitization health — measures the average percentage of principal receivables that are repaid each month. A high payment rate indicates strong demand and, subsequently, high inventory turnover.
As dealers faced liquidity pressures, floorplan providers responded by deferring interest and waiving curtailments. As a result, floorplan receivables aged and payment rates declined. At midyear, 7.8% of GM Financial’s floorplan portfolio was more than 270 days outstanding, compared with 4.4% as of June 30, 2019, according to an S&P presale report. At the other end of the spectrum, 65.5% of receivables were 120-days-or-less outstanding, down from 75.1% in 2019. S&P expects the age distribution to normalize as vehicle sales climb.
For floorplan trusts rated by Moody’s Investors Service, the average MPR fell to 25% in April, down from 41% year over year. But as vehicle sales rebounded in May and June, dealers paid down their floorplan lines, prompting payment rates in floorplan trusts to “rise significantly,” Moody’s noted in a July 21 report. The average MPR increased to 57% in June.
For GM Financial, the monthly payment rate declined “materially” this year, according to the S&P presale report, to 22.6% in April and 32.4% in May. However, GMF’s overall MPRs have been increasing since 2015, and the three-month average payment rate is “well above” the trust’s first payment rate trigger level of 25%, the rating agency noted.
Meanwhile, floorplan providers adjusted structural features of their securitizations to reduce the likelihood of tripping triggers. BMWFS, MBFS, NextGear and NMAC boosted credit enhancement, while
MBFS and BMWFS extended early amortization triggers to six months from three months. Further, Moody’s increased its loss forecast in some triple-A-rated stress scenarios. For instance, Ford Credit’s triple-A loss rate was bumped up to 22% from 20.5%.
Still, one of the variables most tightly linked to floorplan securitization performance is the financial health of vehicle manufacturers. As such, securitized commercial assets, like dealer floorplan ABS, are more credit-sensitive to COVID than consumer assets such as auto loan- and lease-backed securitizations. The reason is that COVID directly impacted labor, supply chains and sales, and there are fewer social programs supporting businesses than consumers.
So far, OEMs have held steady. True, manufacturing capacity is limited, but vehicle sales are on the mend, spurring improved floorplan securitization performance. U.S. light-vehicle sales have risen for four straight months, notching a 15.2 million-unit SAAR in August and beating consensus estimates of a 14.9 million SAAR, according to data from TD Economics.
And GMF, for one, has delivered a floorplan securitization structured much the same as the captive’s May 2019 floorplan ABS deal. The credit support levels for the class A, B, C and D notes were unchanged at 27.9%, 22.9%, 18.4% and 14.4%, respectively. The overcollateralization, cash reserves and payment-rate triggers remained unaffected as well.
Chances are high that GMF will awaken the sleepy floorplan securitization market. Look for lenders like Ally, BMWFS and MBFS to join the fray in the coming months.
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