Page 48 - GIADA-June2017-Final 061517

INDUSTRY INSIGHT

Continued from page 46

is now on auction sites such as Manheim
and Adesa, a critical link in the used-car
food chain.

A New Warning as Fewer Franchise dealerships get first dibs on in-
ventory. The leftovers are available to in-
dependent dealers through online and live
Subprime Auto Borrowers auctions.

KAR's Hallett says the company makes
Pay Off Early money on the volume of cars sold, so ris-
ing supply boosts business. Manufacturers
are also using more of KAR's ancillary re-
BY MATT SCULLY, BLOOMBERG pair and finishing services to make vehi-
cles look as good as possible for sale, he
Fewer subprime borrowers are paying off their auto loans early, a possible sign that said.
consumers with weaker credit scores are struggling more, according to a report by
Wells Fargo & Co. researchers. Supply is currently so swollen Adesa now
offers used dealers a guarantee: they can
Borrowers are making fewer extra payments on loans that were bundled into bonds return any car they buy online within 30
in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells days if it doesn't sell and only end up $50
Fargo analysts led by John McElravey. The data on prepayments may offer another out of pocket.
sign that subprime consumers are having more trouble paying their bills, the analysts
wrote in a note dated Tuesday. Borrowers are already defaulting on a growing amount Used-car dealers are also tweaking their
of auto debt. strategies for a glutted market. Reel, the
Ohio dealer, hunts for unique vehicles that
Last decade, slower monthly payment rates on credit cards were an early sign of the can command a slight premium.
consumer credit cycle changing for the worse, the analysts wrote. For auto loans, slow-
er prepayment may be more of a coincident indicator than a leading one, they wrote. Joe Mok, general manager of Gmotorcars
in Chicago, doesn’t care about unicorns.
Growth in auto debt since the financial crisis has set off alarm bells on Wall Street and His strategy is to sell cheap. He recently
among regulators who are concerned that borrowers may be overburdened and used bought 15 virtually identical 2015 Ford Fi-
car prices are falling. Government enforcement officials have expressed concern that estas for $6,900 and sold them for $7,600.
lenders may be making loans that borrowers can't repay, and packaging them into
bonds that investors are willing to buy. "What's going to make somebody come
to my store if we all have the same color
Total issuance of subprime auto loan-backed securities rose to $7.1 billion in the first Toyota Camry with the same miles?" said
quarter from $5.9 billion in the same quarter last year, according to data compiled by Mok, who owns two dealerships. "They'll
Bloomberg. The growth came even as losses from the debt have risen beyond levels come to me because of the price."
last seen in the aftermath of the 2008 financial crisis.
With used-car prices falling, the pressure
The researchers at Wells Fargo, the number one seller of bonds backed by subprime is on dealers to sell vehicles fast before
auto loans, have said that the bonds pose few risks to bondholders, even though they they lose value.
recommend investors cut their risk exposure because of valuations.
Rather than keep too much inventory on
Slowing prepayments can hurt investors in bonds backed by car loans, said Peter Ka- his lot, Reel entices customers with the
plan, a senior portfolio manager at Merganser Capital Management. They can result in prospect of almost unlimited choice on
a deal's bonds getting paid down more slowly, which can hurt the riskiest securities in the auction sites.
a transaction. "I think downgrades are completely possible," with a remote possibility
that the riskiest securities will take losses, he said. "I can get almost any off-lease car a cus-
tomer wants within 48 hours," he said.
Lenders and big bond graders, such as S&P Global Ratings, have pointed to the debts' "The only question is: 'What color do you
fast amortization and possible upgrades as reasons for investors to have faith in the want?'" n
securities. n

46 | GIADA Independent Auto Dealer JUNE 2017