Interest Rate Roundup

Monday, August 25, 2008

Captive auto finance firms facing fattening spreads

Here is yet another interesting story on the spreading impact of wider spreads -- this time focused on the spread between yields on vehicle-loan Asset Backed Securities over Treasuries. From Bloomberg:

"Wider spreads on auto-loan securities may make it harder for the financing arms of Ford Motor Co., General Motors Corp. and Chrysler LLC to compete with banks for new business.

"Yields over benchmark rates on auto-loan debt from the automakers' lending units has soared to record highs, with the spread on AAA rated bonds maturing in three years climbing 35 basis points last week to 240 basis points more than the swap rate, according to Lehman Brothers Holdings Inc. The swap rate, a borrowing benchmark, is set at 3.7 percent. A basis point is 0.01 percentage point.

"Historically, tight spreads in the ABS market have allowed the auto manufacturers to offer attractive financing to both boost auto sales and compete with bank lending at a relatively low cost,"' Lehman analysts Brian Zola and Sandipan Deb in New York wrote in an Aug. 22 report. "That is no longer the case.

"The higher cost to sell debt in the asset-backed market makes it more expensive for lenders to fund new loans, squeezing auto companies already struggling with slower sales as consumers battered by record gasoline prices abandon the fuel-thirsty trucks that provided most of U.S. companies' profit. U.S. auto sales tumbled 13 percent in July, pushing the industry toward its worst year since 1993.

"Captive auto finance companies, needing to make up for the higher spreads the companies have to pay to raise money, may end up issuing loans to riskier borrowers who would pay higher interest rates, the Lehman analysts wrote."


  • Since I am currently shopping for a car, I have been engaging the sales staff with casual banter about qualifying for car loans. from my anecdotal evidence (state of MN), the debt has not hit the fan in my city yet, but I think it is coming.

    Do you think that car makers are going to be stuck with the need for even heavier discounting to move product?

    With Chrysler no longer doing their own leases and the others curtailing them, that whole component of sales will be diminished.

    My suspicion, again confirmed by anecdotal evidence from the dealers, is that the finance arms of these manufacturers rolled the dice on lease residuals (set them too high) as a means to generate low lease payments and therefore move cars.

    This has backfired as many of these vehicles are coming off leases with far less value than expected.

    The customer will then of course elect to return the car (SUV, really) rather than buy it out.

    You can buy SUVs for about 2/3 of the residual value, I am told.

    By Anonymous Anonymous, at August 26, 2008 at 1:46 AM  

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