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Analysts Blame Economy for Failing Auto Finance Market

November 13, 2008

Business analysts point to the failing U.S. economy and the ongoing credit crunch for the dim credit outlook for the auto finance market, according to Reuters. A report released by Moody’s Investors Service Nov. 4 said the issue will continue to affect the auto finance market in 2009.

Curt Beaudouin, vice president and analyst at Moody’s, said most banks, independent finance companies and automaker-owned finance units or captives have been hurt by higher funding cost due to the credit crunch and depressed profitability due to greater auto loss provisions. He also attributes increasing delinquencies and write-downs of uncollectable debt, decreasing new vehicle sales and higher loss severities due to slumping used-car prices for the decline in the industry.

Beaudouin also added that banks that participate in auto lending are not a leading negative ratings driver, although auto financing will remain a difficult market for banks.

For its part, Wells Fargo/Wachovia company has about $55 billion and 5.9 percent of total loans.

Ford Credit, rated “B2,” is the highest-rated auto captive, other than the “AAA”-rated Toyota Motor Credit. Currently Ford Credit has a review for a downgrade.

Additionally, “Caa1”-rated GMAC and “B3”-rated Chrysler Financial also remain under review for downgrade.

The captives and independent auto finance firms, including AmeriCredit, DriveTime Automotive and Triad Financial, are in the same boat, according to the analyst. “The captives are — and will continue to be — more vulnerable to aggressive financing practices influenced by manufacturer sales target; they are further weighed down by their monocline nature and heavy business concentrations with their troubled manufacturer affiliates,” he explained.

Furthermore, Beaudouin said that buyers increased their debt by purchasing too much and that auto financers contributed by offering aggressive finance terms that steadily increased. By doing so, financers exposed themselves to increased severity of loss.


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