FORT WORTH, Texas — As automobile manufacturers and mobility companies continue to experiment with autonomous vehicles and subscription services, the need for financing will likely diminish, said Tony Boutelle, president and chief executive of CU Direct.
For example, autonomous vehicles could remove the need for families to have multiple cars. “We think it’s going to have a downward impact to lending,” Boutelle told Auto Finance News. “[Consumers] might be able to finance some of these [autonomous] cars, but if they can afford them, they will probably be buying. For the most part, a lot of people will have an autonomous car come to their house and take them where they want to go.”
It will also depend on who is manufacturing and distributing these vehicles, as the franchise system is a “critical piece” because OEMs sell and finance through their franchises, Boutelle added.
“If Waymo, Uber, and Apple become the manufacturers and sellers of these cars, and there aren’t franchised dealerships anymore, how will that impact our capability to make loans?” For now, the timing and fallout are still to be determined. “It’s definitely going to happen,” Boutelle said. “It’s just a matter of when it’s going to happen, and what impact is it going to have on the industry.”
Wholesale used-vehicle prices increased 4.9%, bringing the Manheim Used Vehicle Value Index up to 134.2. However, this year-over-year change is the lowest percentage seen since August 2017, Jonathan Smoke, chief economist of Cox Automotive and compiler of the Manheim Index, told Auto Finance News.
Meanwhile, used-vehicle sales volume decreased 1% year over year, but the annualized pace of used-vehicle sales was up 1% compared with last year.
“Retail used-vehicle sales appear to have peaked, as we’ve seen a steady annualized level of sales of 39.4 million to 39.5 million every month for the past six months,” Smoke told AFN. “We’re seeing underlying demand and supply pressures coming together to limit the market’s growth.”
On the demand side, the principal issue is credit-related, as higher interest rates and tighter credit are limiting what consumers can afford to finance. As for supply, the wholesale market is also peaking. Fewer new-vehicle sales produce fewer trades; off-lease vehicles are growing more slowly; and other sources of used vehicles are stable or in decline. New-vehicle inventories came in under 4 million units for the first time in three months. In fact, inventories are at their lowest levels since January.
“Tighter supply is helping keep used-vehicle values strong,” Smoke added, “but the comparison to last year’s surge in demand in the spring and summer will start to become more challenging as 2018 progresses.”
Moving forward, Smoke advises industry professionals to pay attention to interest rates and average payments — as the Fed will likely announce another short-term rate policy increase on Wednesday, and the market will be looking for any new messages about the likelihood of more than one more rate increase this year.
“If the language indicates that two more increases are likely, rates will likely continue the move-up we’ve been seeing so far this year,” Smoke said. “If, instead, we hear a more measured tone hinting to just one more increase, we will likely see stability in auto loan rates for the rest of spring and summer.”
Cox Automotive estimates also discovered May new-vehicle sales increased 5% year over year, sparked by one more selling day compared with May 2017. Moreover, the SAAR experienced a decline as new-car sales fell 9% compared with last year, but light trucks outperformed cars in May and were up 14% year over year.
The May SAAR came in at 16.8 million, representing an increase from last year’s 16.7 million — but breaking an eight-month streak of new SAAR coming in at or above 17.0 million, the analysis notes.
KBRA put the 2016 securitization — Honor Finance’s inaugural transaction — on “watch downgrade” last week. Honor Finance’s losses “rose considerably over the past few months,” higher than initial expectation for the $8.86 million Class C tranche, KBRA Senior Director William Carson told Auto Finance News. Continued management turnover also contributed to the warning, the ratings agency said.
Transactions can be on “watch” for 90 days, but KBRA can make changes anytime before that “if we see things deteriorate further,” Carson said. “As we saw in this deal, the performance did change negative fairly quickly,” he added.
Cumulative net losses in the transaction are at 17.63% — 5.98% higher than expected. Based on collateral mix at closing and historical performance data, KBRA had expected losses to climb as high as 21.9%. Yet recent analysis has put losses on pace to hit the 27%-to-29% range.
Honor Finance will likely be on issuers’ and investors’ watchlists, Joe Cioffi, chair of the insolvency, creditors’ rights, and financial products practice group at Davis & Gilbert, told AFN. “It could become a bellwether of sorts, ultimately becoming a testament to the ability of credit enhancement to hold off the tide of losses before they reach investors,” he said.
Since warning Honor Finance of the downgrade in December 2017, the Evanston, Ill.-based company’s senior-most executives — President and Chief Executive James Collins, Chief Operating Officer Rob DiMeo, and Chief Financial Officer Lionel Lenz — have left the company.
With automakers like FCA fast-tracking toward autonomous vehicles, it can seem inevitable to think the traditional model of buying and selling cars could face a disruption.
However, concerns with consumer acceptance, safety, and technology costs might hinder that thought, according to Automotive IQ’s Autonomous Vehicles Summit survey.
Although 71% of manufacturers expressed an interest to invest at least $10 million in autonomous technology in the next 18 months, respondents also anticipate autonomous vehicle revenue to account for only 1% to 10% of their organizations’ total revenue. In a nutshell, “although autonomous vehicles are of high priority, they might not be widely accepted by consumers in the next decade,” the survey notes.
The reason, according to the survey stems from a number of concerns that come with autonomous vehicles — the top inhibitor being safety, with about 40% of OEMs stating safety is a top challenge when implementing autonomous technology, the survey finds. Additionally, consumer acceptance, which includes readiness to adopt and pay for new technology, represented 56% of concerns.
Safety issues relate to insufficient performance data, difficulty storing and analyzing data, trade-offs between design and functionality, and cost of sensors and LIDAR technology.
Other top concerns noted among OEMs and distributors were cybersecurity and privacy at 34%, the lack of regulatory frameworks at 32%, and keeping development costs down at 29%.
Despite the concerns, OEMs’ willingness to invest means selling the vehicles through its dealerships, Tony Boutelle, president and chief executive of CU Direct, told AFN. If automakers continue to add autonomous vehicles to their fleets, there could be trouble for lenders.
“If that’s all done by the OEMs and their captives, that’s going to cut out loan potentials to banks and credit unions,” he said. While it’s not clear yet what OEMs’ investment in autonomous vehicles means for lenders, there is “some potential risk,” Boutelle warns.
Despite the specter of rising delinquencies and losses in the auto finance space, longtime subprime financier Mark Floyd believes the market is ripe for new entrants.
“If I were originating loans today, I’d think it’s a great time to enter the market,” said Floyd, who served as chief executive of Exeter for a number of years but now leads Horizon Digital Financial Holdings Inc. “When competitors are pulling back, it’s not a bad time to come into the market and be selective with what you buy.”
A number of lenders have pulled back in the subprime space due to rising delinquencies and losses, but that’s relative to how much lenders tightened up following the financial crisis. Floyd sees few signs that the “sky is falling,” he told Auto Finance News.
For example, 2017 yearend subprime delinquencies 30-to-60 days past due fell 6 basis points compared with the year prior, while long-term delinquencies remained flat, according to 40 lenders in the 2018 Non-Prime Auto Financing Survey.
Additionally, subprime lenders whose delinquency rates increased did so by an average of 22%, while lenders who experienced a decrease in delinquency rate did so by an average of 27%.
“Some of the lenders had to tighten up more than others because maybe they got out of their skies a little bit with credit, but they pulled back,” Floyd said. “Part of the bigger issue I see today is some of the warehouse lenders have tightened up because of the press around auto delinquencies and losses, and that’s created a lot of smaller lenders. Still, access to capital for the well-established companies on the securitization market has been really stable.”
Nicholas Financial Inc. is placing less emphasis on competition and refocusing on purchasing higher-credit quality contracts, reflecting a 23.4% drop in originations, the company announced Wednesday in its earnings report for the three months ended March 31, 2018.
As the first full quarter report under new President and Chief Executive Doug Marohn, the lender was able to “improve our loan metrics by way of lowered amount financed, increased APR / yield and shortened terms,” Marohn said.
The strategy has already improved the company’s delinquency rate. Indirect loan delinquencies 30 or more days past due totaled $33.8 million — down from the $50 million it recorded as delinquent during the same period last year — a 32% drop. Total delinquencies accounted for 8.07% of its indirect portfolio, down from 10.05% the year prior.
The company’s average finance receivables are $310.2 million — a 12% decrease from $352.4 million the year prior. The lender’s average loan term also came down to 50 months, from 56 months last year, according to a Securities and Exchange Commission filing.
Despite the drop in delinquencies, net charge-offs for the whole portfolio grew to 12.26% in 4Q, a year-over-year increase from 11.69%.
Direct auto loans outstanding declined to $9.9 million, from $10.6 million at the same time a year prior. Delinquencies for its direct loans performed predictably better than the indirect portfolio but were still on the rise to 4.88% of the portfolio, up from 3.89% the year prior. However, direct loans only account for approximately 2% of the company’s total receivable portfolio, according to the filing.
On the heels of announcing plans to form its own U.S. captive, Fiat Chrysler Automobiles will launch a subscription program called Jeep Wave — a membership program offering drivers the ability to switch between vehicles for a single monthly fee.
Making its debut in 2019, Jeep’s program will offer vehicles in “good, better, and best” tiers, including different options for insurance coverage. However, Jeep has not released details about the cost of subscriptions, what’s included, or the full list of vehicles to be offered.
Earlier this month, the OEM signaled plans to double Jeep sales by 2022 and this program could certainly assist with that goal. However, it’s unclear who would finance the program, calculate the risk, and run residual values for such a program as FCA is in the midst of discussions to purchase the Chrysler Capital book of loans from Santander Consumer USA. Should that deal not go through FCA would have to build a program from the ground up.
FCA joins other manufacturers that recently announced or launched subscription services this year such as BMW Financial Services, Hyundai Motor Finance, Toyota Financial Services’ forthcoming Lexus program, and Mercedes-Benz Financial Services.
This week, Mercedes-Benz released pricing details of its subscription service, Mercedes-Benz Collection. The program is priced at $1,095 to $2,995 per month with members paying a one-time activation fee of $495. The service will be tested in Nashville, Tenn. and Philadelphia.
With the subscription market growing rapidly and consumer appetite changing when it comes to obtaining vehicles, “financial and mobility services are evolving to fit those demands,” Geoff Robinson, vice president of Mercedes-Benz Financial Services unit, said in a press release.
Similar to Jeep’s plans, there are three tiers — “signature, reserve, and premier.” Subscribers can access any type of vehicle within their tier with no mileage limitations. The monthly subscription fee for the tier also includes insurance, 24/7 roadside assistance, and vehicle maintenance.
Nonprime portfolio balances increased year-over-year to $34.6 billion at yearend 2017, yet the number of loans originated during that time decreased, according to data from the 2018 Nonprime Automotive Finance Survey.
Balances grew by 5.3% year-over-year in 2017 for the seventh consecutive increase for the 40 nonprime lenders surveyed. However, the number of loans originated dropped by 11.8% from 2016 to 2017, compared with a 1.8% drop from 2015 to 2016, according to the survey.
With the average amount financed going up and the length of loan terms getting longer, the data shows new people are applying for vehicles every year, “so those balances are going up, but at the same time there are fewer people financing vehicles,” Ben Werner, director of solution marketing at FICO told Auto Finance News. “Financial metrics are mixed to weak in some areas,”
Werner attributes the trend of lower originations and higher balances to greater competition, tightened credit standards, higher financing rates, and efforts to improve operational efficiencies and reduce fraud. However, Werner said this is not a universal trend — some financing sources reported year-over-year portfolio growth of over 30%.
The National Automotive Finance Association and American Financial Services Association generated the report in collaboration with FICO, TransUnion, IHS Markit and Black Book.
Further data from the report includes:
Automated origination activity is increasing.
Rise in dealer, first-party and synthetic identification fraud.
Used-vehicle depreciation was mitigated by destructive hurricanes, which increased the demand for used vehicles.
The customers of nonprime auto finance companies represent mainstream America.
New York-based insurance company Assurantexpands its size and scale within vehicle protection with its $2.5 billion acquisition of The Warranty Group from TPG Capital.
The companies jointly operate across 21 countries, and Assurant President and Chief Executive Alan Colberg said the deal solidifies its “global position” as a provider of vehicle protection services.
As a combined entity, Assurant has the resources to enhance its presence in the Asia-Pacific market and obtains access to new client partnerships and distribution channels, including dealer networks and national accounts. By the end of 2019, Assurant expects to generate $60 million of pre-tax operating synergies by optimizing global operations.
The total enterprise value represents about 10.4 million Assurant shares, or $993 million based on the acquisition agreement closing price, and $1.5 billion in cash, after repayment of TWG’s $596 million of existing debt.
Assurant originally announced the acquisition in October 2017. As part of the transaction agreement, Assurant Inc. will become a wholly owned subsidiary of TWG Holdings Ltd., whose name will change to Assurant Ltd.
BRP Inc., a manufacturer of all-terrain vehicles, snowmobiles, and marine crafts, has completed the refinancing of its credit facilities, the OEM announced.
A credit facility is an overall credit line that can be broken into multiple credit lines and collateral. It’s often used by businesses to provide capital for multiple purposes and time frames without the need to structure a loan for each one.
BRP has two credit facilities: a term loan facility and a revolving credit facility. Following BRP’s refinancing, the principal amount advanced under the term loan facility was increased to $900 million from $789 million. The revolving credit facility was increased to $575 million from $475 million.
The loan facility and the revolving credit facility had their maturity date extended for two more years until 2025 and 2023, respectively.
The term facility was incurred at an original issue price of 99.75% and pricing was reduced by 50 basis points while the revolving credit facility is subject to a 25 basis points reduction in pricing. Other amendments made to the terms of the agreements provide additional flexibility for BRP and its operations.
