Auto lenders have been taking it on the chin for months now, and it seems things will get worse before they get better.
So far, financiers have largely blamed their woes on high gas prices, a tough economy, and higher-than-expected residual losses. But in the next few months, troubles related to dealer floorplans will begin to surface.
Vehicle sales are on the skids, and slower turnaround on dealership lots makes it tougher for dealers to repay their inventory loans. Compounding the problem is the fact that some lenders — like GMAC, for one — plan to raise floorplan interest rates, which will put even more pressure on dealers’ repayment abilities.
So now, in addition to worrying about worsening consumer credit performance and soaring vehicle loss severity, lenders face an added dilemma: what to do about rising floorplan delinquency rates. Financiers will have to keep close tabs on their floorplan customers, particularly those whose sales volume relies heavily on leases. Lenders will certainly have to beef up their staffs to address dealer issues on a case-by-case basis, much the same way they’re doing for consumers facing financial difficulties. And despite those efforts, floorplan performance is bound to deteriorate.
It will be interesting to see how financiers tackle the issue. What are some methodologies that can be implemented? How severe will the performance issues be? Will lenders exit the space?
Marci, most floorplans are paid on a usage basis. that is to say, dealers wheather furniture or automobile populate thier inventory from barrowings against thier floorplan. Generally the floorplan is reduced when the inventory is sold. The problems arrise when inventory is sold and the floorpan provider is not paid down within (generally) three days. As you know, floorplan is considered a staple within the automobile industry and historical losses for captive automobile floorplan are extremely low. When my group replaced NMAC’s floorplan several years ago the losses were something like 15bp.
B. Lazenby
Bobby, thanks for your comment. Perhaps those losses of 15 bps several years ago might turn into something more substantial today. I agree 15 bps is a relatively nominal number, but perhaps at 50 bps or 100 bps those losses become significant. And those losses will hurt all the more today as financial services firms are trying to regain their footing on so many different fronts.
It does not matter as much if the industry losses are 15 bps or 50 bps – the problem is that when a floor plan source takes a hit – it is usually a big one and very often in the multi-million $ range. Your portfolio can go years with no losses and then a couple of big losses come around and your returns that you thought looked good now look terrible. Floorplanning is great as long as you don’t have any losses. My guess is that right now floorplan lenders are taking some hits.
I’ll be adding some in-the-moment reactions to the press conference, as well.