Chrysler News

A deteriorating U.S. economy combined with an ongoing credit crunch is darkening the credit outlook for the auto finance market well into 2009, said Moody’s Investors Service in a report on Tuesday.

“The sector is clearly under severe stress,” said Curt Beaudouin, vice president and analyst at Moody’s. He noted increasing delinquencies and write-downs of uncollectable debt, higher loss severities due to slumping used-car prices, as well as shrinking new vehicle sales.

The auto finance industry, which includes banks, independent finance companies and automaker-owned finance units or captives, has also been hurt by higher funding costs due to the credit crunch and depressed profitability due to greater auto loss provisions, he said.

The analyst said participating banks are less vulnerable to these mounting risks, and their auto lending is not a leading negative ratings driver.

“For none of these banks, however, is auto finance exposure a leading negative rating driver. They possess more diversified asset and earnings bases and are not tied to the manufacturers,” said Beaudouin.

Still, he said, auto finance will remain a difficult market for the banks. Their profit and/or asset quality potential will always be subordinated to the behavior of the captives, which they can’t control.
“Banks would like to exit the market, but there are no willing buyers for their auto operations. So, banks are withdrawing from the business by slowing originations and winding down portfolios,” said Beaudouin.

“The captives are — and will continue to be — more vulnerable to aggressive financing practices influenced by manufacturer sales targets; they are further weighed down by their monoline nature and heavy business concentrations with their troubled manufacturer affiliates,” said Beaudouin.

The same basic picture applies to the independent auto finance firms, he said.

“Their monoline (heavily subprime) nature and severely impaired wholesale funding model have caused retrenchment in the shrinking universe of independent auto finance companies,” said Beaudouin, “and this trend is expected to continue.”

Those exposures must now be worked through, he said.

“Buyers have simply bought too much vehicle, thereby increasing their debt burden,” said Beaudouin. “Auto lenders were enablers in this process, by offering increasingly aggressive financing terms and exposing themselves to increased severity of loss, in a phenomenon we refer to as ‘the trade-in treadmill,” said the analyst.

In addition, he said, the ongoing credit crunch, in place since the summer of 2007, has been hurting the cost and availability of funding for auto finance companies, while deteriorating economic conditions are taking a toll on the consumers, the used car market and new vehicles sales.

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