Dealer-floorplan lenders are preparing an onslaught of securitizations, according to Asset-Backed Alert.
The offerings are expected to hit the market in two big batches, one in the first week of February and the other in early March, in order to qualify for the two final monthly rounds of buyer financing available through the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF).
TALF’s next funding rounds go out Feb. 5 and March 4.
Most of the upcoming deals would be backed by loans that help car dealers finance their inventories. Ford, which is typically among the most prolific issuers of such securities, is expected to be behind at least two of the transactions. BMW and Hyundai are also preparing offerings, as is General Motors affiliate GMAC.
There’s speculation that Chrysler Financial is interested as well, although the source of its receivables remains unclear. When affiliate Chrysler entered a government-brokered bankruptcy arrangement last April, all of its dealers agreed to shift their floorplan financing to GMAC. But the still-solvent Chrysler Financial continued to hold a loan inventory that it might now hope to securitize. Or it could be trying to raise money to revive its floorplan business.
Outside auto-related issues, GE Capital appears to be lining up a deal. Most of its floorplan securitizations have been backed by loans to dealers of recreational vehicles.
Why the urgency to get in on TALF’s final rounds? With the auto industry on unsteady ground, investors are reluctant to take on exposure to dealer loans – and the program’s financing terms offer them a way to shift some of that risk to the Fed.
Indeed, spreads on non-TALF floorplan bonds would likely prove unaffordable for issuers at this point. That differs from most other asset classes, where months of improving market conditions have helped non-qualifying transactions trade at yields roughly equivalent to those on qualifying ones. The upshot: The next two TALF rounds are likely to be dominated by floorplan securities.
Once TALF expires, it’s possible that the supply of floorplan-loan securitizations will dry up. And it remains to be seen how the planned issues will fit into the overall funding strategies of Ford and GMAC, which indicated late last year that they would boost their production of auto-loan and floorplan bonds in 2010.
There’s a chance some issuers will turn to commercial-paper conduits for funding, although operators of those vehicles are also hesitant to take on the underlying loans.
Nine term securitizations of dealer-floorplan credits totaling $5 billion were sold in the U.S. in 2009, according to Asset-Backed Alert’s ABS Database. All but one, a $500 million issue from Ford in June, were eligible for TALF financing. However, the overall production of those issues was stymied by difficulties issuers faced in earning top grades for their bonds – a necessity for TALF eligibility.
Only one floorplan issue has priced so far in 2010, also from Ford. That Jan. 6 issue, which met TALF conditions, included a $1.2 billion slice of triple-A-rated 3-year bonds that priced at 165 bp over Libor. It was rounded out by double-A and single-A classes retained by the automaker.
For most of its history, the Federal Reserve has been a high temple of monetary matters, guiding the economy by setting interest rates but remaining aloof from the messy details of day-to-day business.
But the financial crisis has drastically changed the role of the Fed, forcing officials to get their fingernails a bit dirty, according to the New York Times.
Since March, when the Fed stepped in to fill the lending vacuum left by banks and Wall Street firms, officials have been dragged into murky battles over the creditworthiness of narrow-bore industries like recreational vehicles, rental cars, snowmobiles, recreational boats and farm equipment – far removed from the central bank’s expertise.
A growing number of economists worry that the Fed’s new role poses risks to taxpayers and to the Fed itself. If the Fed cannot extract itself quickly, they warn, the crucial task of allocating credit will become more political and less subject to rigorous economic analysis.
That could also undermine the Fed’s political independence and credibility as an institution that operates above the fray – concerns Fed officials acknowledge.
Executives and lobbyists now flock to the Fed, providing elaborate presentations on why their niche industry should be eligible for Fed financing or easier lending terms.
Hertz, the rental car company, enlisted Stuart E. Eizenstat, a top economic policy official under Presidents Bill Clinton and Jimmy Carter, to plead with both Fed and Treasury officials to relax the terms on refinancing rental car fleets.
Lawmakers from Indiana, home to dozens of RV manufacturers, have been pushing for similar help for the makers of campers, trailers and mobile homes.
And when recreational boat dealers and vacation time-share promoters complained that they had been shut out of the credit markets, Sen. Mel Martinez, a Republican from Florida, weighed in on their behalf with the Treasury secretary, Timothy F. Geithner, who promised he would take up the matter with the Fed.
“This is the most straightforward indicator of why we don’t want the government doing this, except in an emergency,” said Douglas J. Elliott, an economist at the Brookings Institution who supports the new lending program but worries about its long-term implications. “There is no clear line about who should be included and who shouldn’t be included. It’s an inherently political decision,” he added.
Big money is at stake. At issue is a joint venture of the Fed and the Treasury aimed at making more credit available. The program, known as the Term Asset-Backed Securities Loan Facility, or TALF, has bought about $27 billion in securities backed by credit card debt, car loans and student loans. In buying the securities, the Fed is providing the money that ultimately reaches businesses or consumers trying to borrow.
Despite a slow start, the program could soon expand broadly. This week, the Fed will add commercial real estate mortgages – a vast market – to the list of loans it will buy. Eventually, officials say, the TALF program could provide as much as $1 trillion in financing.
Fed officials say they, too, are uncomfortable with their new role and hope to end it as soon as credit markets return to normal. When R.V. manufacturers recently sought a meeting, senior Fed staff members refused to see them in person and instead heard their pleas in a conference call.
The central bank is increasingly having to make politically sensitive choices. For example, it is weighing whether loans to people who buy speedboats and snowmobiles are as worthy of help as those to people who buy cars. And it is being besieged by arguments from RV manufacturers and strip-mall developers that they play a crucial role in the economy and also deserve help.
Many of the decisions could have political repercussions. On Feb. 9, President Obama traveled to Elkhart, Ind., a Republican stronghold that Democrats hope to convert to their column. Elkhart is also home to much of the RV industry, which has been battered by the recession.
“When we talk about layoffs at companies like Monaco Coach and Keystone RV and Pilgrim International, we’re not just talking numbers,” Obama said, referring to three prominent RV companies. “We’re talking about people who’ve lost their livelihood and don’t know what will take its place.”
At the time, Fed and Treasury officials suggested that they would finance only car loans, credit card loans, student loans and Small Business Administration-guaranteed loans.
But the Recreation Vehicle Industry Association (RVIA) and Indiana lawmakers – among them, Rep. Joe Donnelly, a Democrat, and Rep. Mark Souder, a Republican – were already lobbying the Fed to include loans for recreational vehicles on its list of eligible collateral that the Fed would accept.
They were not alone. Rental car companies were pushing the Fed to finance their fleets. Hertz, which is owned by two private equity firms – the Carlyle Group and Clayton, Dubilier & Rice – hired Eizenstat to make its case.
In trying to persuade the Fed to relax its loan terms, Eizenstat led delegations of Hertz officials to both the Treasury and the Fed. They reached out to Ron Bloom, the co-chairman of the Treasury Department’s auto task force, as well as to top aides to Mr. Geithner. They also made detailed financial presentations to Fed officials in Washington and New York.
While the Fed so far has denied Hertz’s requests to relax loan terms, some of the lobbying appears to have worked. In March, the Fed announced that it would purchase loans used to buy light trucks and recreational vehicles. It also said that it would finance equipment leasing deals, rental car fleets and “floor plan” loans, which car and RV dealers use to finance showroom vehicles.
On May 17, the Fed refined its rules even more, saying that “recreational vehicles” included not just RVs but also boats, motorcycles and snowmobiles.
Fed officials said they had always intended to include those vehicles because they had long been financed through asset-backed securities of the type the loan facility was created to preserve. And the series of expansions, they said, did not reflect a capitulation to industry pleas. Rather, they simply announced additional details as policy decisions were reached.
Almost inevitably, industry groups are grumbling that the Fed’s terms favor some, like consumer car loans and credit card debt.
Mathew Dunn, a lobbyist for the National Marine Manufacturers Association, said collateral requirements for loans to recreational boat dealers are higher than those for securities backed by car loans.
That may soon change. In late May, the Small Business Administration said that it would open one of its main lending programs to RV dealers. Because the Fed has already agreed to finance SBA loans, it may not be long before it is financing boats, snowmobiles, motorcycles and campers.