October 19, 2016 / 5:55 PM / a year ago

Fitch: US Floorplan ABS Stable; Auto Sales, Dealer Margins Slide

(The following statement was released by the rating agency) NEW YORK, October 19 (Fitch) The best of times may have passed for US auto dealers with vehicle sales likely past their peak and dealer profit margins slipping. However, US auto dealer floorplan (DFP) ABS trust performance metrics and ratings will remain stable heading into 2017, according to Fitch Ratings. Auto sales dipped in 2016, and manufacturers used a combination of higher cash incentives and 0% financing to entice consumers into showrooms. Incentives rose each month going back to early 2015 and were close to $3,900 per vehicle in September. These sales tactics will continue to eat into dealer profits and push down used vehicle values into 2017. However, dealer profits remain healthy at a lower level, while overall dealer costs, including capital financing costs, stay low. US automobile inventory levels hit 61 days supply through Sept. 1, according to "Automotive News," the highest level for the month of September going back to 2012. Vehicle inventories that sit on dealer lots for longer periods mean higher dealer costs, lower dealer profit margins and lower monthly payment rates (MPR) in DFP ABS. Supply ranged from 55 to 61 days for the same period going back to 2012. Dealers typically aim for a 60-day supply level. Therefore, the current rate is at the top of this range but could rise further if sales dip and production is not managed by manufacturers. Manufacturers with higher inventories through Sept. 1 included Dodge/Ram (81 days), Ford (78 days), General Motors (74 days) and Chrysler (71 days). Fitch's Auto DFP ABS MPR index averaged 38.2% through the September distribution period, versus 41.3% recorded for full-year 2015. The decline was driven by slowing sales and creeping inventory levels. The 3-month average MPR in the Ford Credit Master Owner Trust was down marginally through September on a yearly basis, but comfortably within historical levels. General Motors Financial Master Owner Trust DFP platform's MPR was fairly stable last month and also within historical levels. Dealer profits appear to have plateaued and come off their peak. The National Automobile Dealers Association reported dealer profit levels declined 4.1% (pretax) through second-quarter 2016 compared with second-quarter 2015. Dealers' ROE for first-half 2016 was 31.3%, compared to 33.5% when sales peaked a year earlier. Importantly, none of the outstanding DFP ABS trusts have any losses or dealer defaults over the past year, as dealer health is still fairly robust, despite some metrics slowing as mentioned, the majority of dealer networks are all in good shape financially. The number of dealers also remains at a far lower level than the period leading up to, and during, the most recent recessionary period when there was a clear oversupply of dealers - particularly for US networks that issue DFP ABS. Manufacturers are clearly not looking to add dealer locations and this will bode well for the existing dealer networks. Fitch's outlook for the sector is stable for asset and ratings performance. We currently rate seven DFP ABS trusts issued from 23 outstanding series totaling $17.0 billion. Contact: Hylton Heard Senior Director +1 212 908-0214 Timothy McNally Associate Director +1 212 908-0870 Rob Rowan Senior Analyst Fitch Wire +1 212 908-9159 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. 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