NEW YORK -(Dow Jones)- The financing arms of U.S. auto makers are likely to shift to longer-term car loans as they eliminate or scale back their participation in the leasing business.
A longer maturity on loans translates into a slower repayment of principal, increasing the potential magnitude of losses resulting from defaults. It also means that these companies should set aside more reserves to account for possible losses from these loans - on top of the funds they have squirreled away to support the souring credit quality of their portfolios.
But these longer-term loans - which can now stretch out as long as 84 months, or 7 years - are one way that General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler LLC can seek to clear bloated inventories and avoid further market- share losses. With fuel prices above $4 a gallon and consumer confidence on the decline, Detroit’s auto makers have been stung by steep declines in sales of the pickup trucks and sport-utility vehicles that have long sustained their businesses.
As the financing arms of these auto makers eliminate or cut back on unprofitable lease agreements - a trend that has picked up momentum in recent days - longer-term loans for car buyers can bring down monthly payments for borrowers to the same level as payments made under leasing agreements.
“What you’ll probably see is that captive financing arms focus a bit more on longer-term loans, such as 72-month loans to help reduce monthly payments,” says Chris Wolfe, an analyst at Fitch Ratings.
Wolfe warned, however, that longer-term loans increase the ultimate loss severity in the event of default, noting that the amount of unpaid principal is larger than it would have been on a shorter-term loan.
“From our perspective, longer loans mean loss-incurred-in-case-of-default becomes higher,” says Wolfe. “Are companies factoring that into the price they charge the customer? Are they factoring that into the loss reserves?”
Chrysler To Extend Loan Terms
Fitch on Tuesday downgraded its issuer default rating on Chrysler to CCC, just two notches above a default rating. The move followed Chrysler’s announcement Friday that it would no longer offer leases through its Chrysler Financial lending arm.
Fitch said that the downgrade reflected Chrysler’s restricted access to economic retail financing for its vehicles, which is expected to further cut into sales volume. It added that “the lack of competitive financing is expected to result in more costly subvention payments and other forms of sales incentives.”
Chrysler Financial, which typically extends 36-month loans to car buyers, will do more 60-month loans, according to Bill Porter, a spokesman.
The question of longer-term loans comes “into play when we had to make the decision to move away from leasing. It’s shifting the risk,” says Porter.
“You still have the risk of consumer finance; people can still default on their loans. What added to the lease was the risk of declining residual values,” he said. “We believe we can effectively manage our risk through disciplined credit policies on the loan side.”
Leasing comprises an estimated 20% of U.S. auto sales, and has been a key tool used by auto makers to offer lower monthly payments on vehicles customers couldn’t otherwise afford. In recent months, however, leases have become a liability amid tanking resale values, especially of used pickup trucks and SUVs.
In most cases, when a lease is up, the customer returns the vehicle to the auto finance arm, which then resells the car or truck. The lower worth of the vehicle has spelled losses at these companies at the time of resale, and, a fall in the value of their existing portfolio of lease agreements.
Longer Loans Are Key Incentive
Ford announced last week that it wrote down $2.1 billion to cover unprofitable auto leases at its Ford Motor Credit arm in the second quarter. GM affiliate GMAC LLC could announce big lease-related losses when it releases its second- quarter financial report on Thursday.
This week, Ford informed its dealers that it will raise the prices on leases on its most-profitable trucks and SUVs due to the “extreme losses” Ford Motor Credit is taking on these vehicles. GMAC, in which Cerberus Capital Management has a 51% stake and GM has the remainder, said it will no longer extend auto lease deals to consumers with the lowest credit ratings.
“This isn’t the first time auto makers have taken losses on residual values,” said Robert Schulz, an analyst at Standard & Poor’s. “What makes it a little unique now is that they are stopping and ending leasing completely,” he added, referring to Chrysler.
Schulz said that S&P is worried about the potential for the auto makers to implement more broad-based and aggressive incentives.
Cut-rate financing for longer terms has become a key incentive in the arsenal of auto makers.
“Longer-term contracts may be one way to essentially keep” payments on a car loan in line with lease payments, says Curt Beaudouin at Moody’s Investors Service.
“That’s the rock and the hard place that the manufacturer and finance companies are in between at the moment,” says Beaudouin. “The risk is if you loosen standards now to drive sales in the absence of leasing, you’re inviting more credit losses.”
-By Aparajita Saha-Bubna, Dow Jones Newswires; 201-938-2137; aparajita.saha- bubna@dowjones.com
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AUBURN HILLS, Mich., July 28 /PRNewswire/– Hispanic Business Magazine
named nine Hispanic-owned Chrysler LLC dealers to its 2008 annual “Top 500″
U.S. Hispanic-owned companies list. Dealers made the list based on the
following criteria: Revenue dollars; Hispanic ownership of at least 51
percent; and fully operational for the 2007 calendar year.
Hispanic Business Magazine’s list included three Chrysler dealers in
the top 10. The top dealer, ranked No. 3, was Lloyd Chavez Jr. of the Burt
Automotive Network in Centennial, Colo., which includes Burt Chrysler Jeep
Dodge of Parker, Colo., and other franchises. The dealership group boasted
$2.12 billion in revenue last year. The second dealer was Ernesto Ancira
Jr. of Ancira Enterprises Inc., which was ranked No. 7 and grossed $691.26
million. Ancira Enterprises includes Ancira 281 North Chrysler Jeep; Ancira
Dodge; and Ancira Motor Co., among its many franchises. Also on the list
was Frank Rodriguez of Greenway Ford Inc., at No. 9, which grossed $520.13
million. Rodriguez’s franchises include Greenway Chrysler Jeep Dodge in
Orlando, Fla.; and Atlanta Chrysler Jeep Dodge in Atlanta.
In total, the nine dealers grossed more than $4 billion* last year.
“Chrysler’s Hispanic dealers are an economic force in this country,”
said Cecil Ward, Senior Manager - Network Diversity and Dealer Development.
“This ranking is significant to Chrysler because it demonstrates the
strength of our minority dealer network and also is a testament to the hard
work that many people have put into these dealerships.”
The Hispanic Business Magazine “Top 500″ list is widely recognized as
the most respected measure of Hispanic-owned business performance. The
entire list totaled $36.1 billion in revenues last year.
This is the 26th year of the Hispanic Business Magazine “Top 500.” The
dealers that made the “Top 500″ list are:
* Dealer’s revenues also included sales from other automotive dealerships.
3 The Burt Automotive Parker, Colo. Lloyd Chavez Jr. $2.12 billion
Network
7 Ancira Enterprises San Antonio, Ernesto Ancira Jr. $691.26 million
Texas
9 Greenway/Atlanta Orlando, Fla. Frank Rodriguez $520.13 million
Chrysler Jeep Dodge
24 Gonzales Automotive South Gate, Silvestre Gonzales $274.60 million
Group Calif.
41 Elder Automotive Troy, Mich. Irma Elder $159.56 million
Group
76 A&D Automotive Dothan, Ala. Dino Velaquez $93 million
101 Varela Auto Palestine, Fernando Varela $61.54 million
Group Texas
103 Tamiami Automotive Miami, Fla. Carlos Planas $60.99 million
Group
105 Love Chrysler, Inc. Corpus Marion Luna Brem $57.50 million
Christi,
Texas