fall
Chrysler is getting out of the US automotive leasing sector. It
reported at the end of July that its US finance subsidiary,
Chrysler Financial would stop offering leasing with effect from
August 1 2008 as a result of rapidly falling resale values of sport
utility vehicles (4x4s) and trucks.
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Chrysler’s decision followed news that Ford Motor Credit (FMC)
had recorded a net loss of $1.4bn (£742m) in Q2 2008. On a pre-tax
basis FMC reported a loss of $2.3bn (£1.1bn) compared with earnings
of $112m (£57m) the previous year. Excluding a $2.1.bn (£1bn)
impairment charge for operating leases, the company incurred a
pre-tax loss of $294m (£151m) during the quarter.
Following the hike in fuel costs and the economic downturn during
Q2 2008, US car buyers shifted their preference for 4x4s and
full-size trucks to smaller, more fuel-efficient vehicles. This
caused a fall in auction prices for the larger vehicles with the
consequent fall in residual values (RV). FMC’s quarterly North
America operating lease review revealed that lease-end RVs would be
“significantly lower than previously expected” and led to the
$2.1bn impairment charge.
Mike Bannister, FMC’s chairman and CEO explained that the company’s
on-balance sheet net receivables totalled some $136bn (£70bn), down
from $141bn (£73bn) at the end of 2007. Nevertheless, he added:
“The core of our business remains strong, because it is built upon
lending practices, risk management and collections activities that
are consistent and prudent.”
GMAC meanwhile, wrote down a $716m (£369m) impairment charge
relating to its lease portfolio as part of its Q2 2008 $717m loss
(£369m) in its Automotive division (a quarterly $2.5bn [£1.3bn]
loss for the company overall, when its ResCap mortgage arm is
included). The loss, which compares with a profit of $395m (£203m)
for the same period the previous year, reflects a low point in
quarterly automotive results for the company going back some eight
consecutive reporting periods
.
Ratings agency Standard & Poor’s (S&P) cut its ratings for
DaimlerChrysler Financial Services, GMAC, and Ford Credit to ‘B-‘
from ‘B’, and similarly downgraded the captives’ manufacturer
parents. FCE Bank plc, Ford Credit’s European bank, had its rating
cut to ‘B’ from ‘B+’. All outlooks are negative, S&P said.
No surprise there then
The significance behind the impairment charge is
that the present value of GMAC’s $30bn (£15bn) North American lease
portfolio is substantially greater than the amount it expects to
recover once the vehicles are returned for resale.
Robert Hull, GMAC’s chief financial officer explained: “Nearly all
of the impairment was related to 4x4s – no surprise.” In July, for
example, GMAC recovered only 75 per cent of the value it expected
from 4x4s coming off lease. Pickups also declined, although not so
sharply, and passenger cars were flat compared to the company’s
original expectations.
As a result, GMAC confirmed that it would suspend incentivised
leasing in Canada and reduce the volume of new leases in the US –
largely through product and pricing refinement.
The US lease experience, of course, relates primarily to personal
leasing, a mode of funding that is struggling to become accepted in
the UK. Because personal leasing can make expensive vehicles
cheaper to drive than lower-priced ones it had begun to play the
same role in the US market as interest-only and adjustable-rate
loans did in weakening the housing market.
One dealer principal said: “Leasing was being used in some cases to
get people into a car who probably economically should not have
been in leases. That kind of exposure is a little bit of a bubble
that needed to be cleaned up.”
Manheim Consulting’s chief economist Tom Webb explained that
automotive lenders have been in the front lines of both a
deteriorating economic environment, which has led to higher default
rates, as well as the credit crisis which has increased the cost
(or reduced the availability) of new funds for originations.
“The result,” he said, “has been higher arrears, lower recovery
rates on repossessions, a tightening of lending standards and
substantial slowing of originations. This has set the stage for
repossession volumes to fall in 2009.”
Going forward, Webb does not expect US automotive lenders to loosen
underwriting standards again for quite a while – “at least until
the economy recovers”.
Brian Rogerson
