Nonbank auto lenders, such as captives and independent financiers, will likely find it harder to secure additional liquidity from capital markets due to the novel coronavirus, according to a report S&P Global shared with Auto Finance News.
“For most of the last decade, non-bank financial institutions have found relatively easy access to funding from capital markets and banks,” the report read. “However, during times of volatility that can dry up, and those reliant on short-term debt can be particularly affected.” Further, COVID-19 could dampen the economy and the credit quality of borrowers.
In addition, wider spreads could also put pressure on funds garnered through the securitization market, as investors’ appetite for higher yields could put pricing pressures on lenders, who must keep interest rates low in light of consumer affordability. “Lower rates — while meant to offset the epidemic — will almost certainly pressure [lenders’] net interest margins and profitability,” S&P noted.
Further, consumer confidence is also taking a hit, according to the University of Michigan’s Survey of Consumers Index.
“Consumer sentiment fell in early March due to the spreading coronavirus and the steep declines in stock prices,” chief economist Richard Curtin wrote in a research note, explaining that “the initial response to the pandemic has not generated the type of economic panic among consumers that was present in the runup to the Great Recession.”
Cox Automotive’s analysis also expects diminishing consumer confidence, as well as a decrease in gross domestic product. “This expectation is based on the U.S. now seeing school closures, its first quasi-quarantine, major sporting events being cancelled, and a travel ban from Europe for non-citizens,” Cox noted. “While domestic travel has not been restricted, it has been severely impacted.”
Due to the volatility of the market and a falloff in consumer sentiment, the initial SAAR forecast Cox Automotive issued in January of 16.6 million is “no longer achievable,” a spokesman told AFN.
“We are developing scenarios based on market data and trends and will provide an updated forecast in the coming days. What is clear though, the U.S. auto market will drop well below the 17 million of 2019,” he said, noting that the market is fluid and could change daily.
Fears around the market’s response to COVID-19 came to a head yesterday, with the Dow Jones Industrial Index dropping nearly 10% and the S&P 500 Index dropping 9.5%, the index’s largest single-day drop since Oct. 19, 1987, also known as Black Monday.
The market bounced back today, with the Dow Jones recouping most of yesterday’s losses, closing 9.4% from market open. S&P 500 also rebounded 9.2% today when the markets closed.
Additional reporting by Bianca Chan.
