Financial headlines have been dominated in recent weeks by
articles relating to the so-called “credit crunch”, a period of
turmoil in global money markets. Initially triggered by
difficulties in the US sub-prime market, the crunch has seen many
financial institutions lose a lot of money as collateralised debt
obligations – which bundled up sub-prime consumer credit products
into tradable investment vehicles – went sour amid rising levels of
arrears and bankruptcy and a downturn in the US housing market.
This in turn made banks more reluctant to lend to each other,
meaning corporate merger and acquisition deals and buyouts have
been adversely affected by a lack of funding.
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However, while one major international deal – the acquisition of
PHH Arval in the US by GE Capital Solutions, Fleet Services – has
run into trouble as a result of lack of liquidity in the money
markets, and the US National Automotive Finance Association has
reported that arrears levels among sub-prime customers are at their
highest point for three years, this has not deterred Hyundai Motor
Finance from looking to raise $859m (£430m) in the US through the
sale of securities backed by motor loan contracts.
In addition, ratings agency Standard & Poor’s has said that
according to its research, liquidity levels among the global car
manufacturers are still strong, and they are in the main still able
to draw down funds from their revolving credit lines. Despite
difficulties in the asset-backed securities (ABS) market, analyst
Maria Bissinger said the non-investment grade manufacturers –
Chrysler, Ford, and GM – still have access to funds via the auto
loan ABS market, “albeit at a higher cost than in recent
years”.
The UK picture
Closer to home, several motor finance providers have told Motor
Finance that they believe the worst has passed – and that the
so-called “crisis” was in fact never as severe as it was made out
to be by the media.
Both Nigel Williams, business development manager at Black Horse
Motor Finance, and Peter Cottle, senior director at Capital Bank
said that in their opinion, motor finance providers in the UK have
reason to be confident about the future, and need not fear a
massive slump in volumes.
While news photographs showing long queues at mortgage lender
Northern Rock (NR) sent shockwaves through the finance sector,
Williams noted that NR had a “unique business model” reliant on
funding from the international money markets, which meant
consequently that it was more severely affected by the turmoil in
the US sub-prime sector than other UK banks and finance houses.
“More traditional lenders were not impacted in the same way,”
Williams said. Cottle said: “NR made the headlines for the wrong
reasons. What we saw was a liquidity issue, not a ‘credit crunch’.
Our view is that we have not seen an impact on point of sale
finance.”
Cottle ascribed consumer nervousness over the summer to rising
interest rates, as well as to the first waves of housing loan
borrowers reaching the end of their fixed-term interest rate
mortgage periods, and feeling the pressure from higher commodity
prices, and higher mortgage repayments. However, with the Bank of
England having decided to hold interest rates at 5.75 per cent, and
with the predictions that the base rate will fall next year, there
is further reason for confidence, Cottle said, while Williams said
that mortgage customers whose fixed-rate periods come to an end in
two to three years’ time “might just ride through the current storm
unscathed”.
Miles Roberts, managing director of Southern Finance, struck a
more cautionary note: “Higher mortgage payments will impact heavily
on other finances and, as a result, the car could be the first to
go. With this in mind, we are warning motor retailer and motor
finance companies to do more detailed credit checks – and ask more
questions – before signing up new borrowers.”
Both Black Horse and Capital Bank have adjusted their rates to
reflect higher base rates, but have otherwise avoided passing on
costs to customers. While Cottle reported that Capital Bank has no
plans to look at increasing its exposure to the non-prime market,
preferring to maintain focus on its core business, Williams said
that Black Horse has recently begun to grow the volumes of deals it
accepts which previously it would have turned down. “The customer
rate isn’t affected but the dealer gets a lower commission rate,
and we are finding there is an appetite for this,” Williams
said.
The non-prime view
Peter Critchley is sales director at Blue Motor Finance, the
specialist motor finance company offering hire purchase facilities
to customers that have impaired credit or have failed a ‘prime’
scorecard and are therefore classed as “near-prime”. Critchley
commented that whilst the recent financial news headlines of a
‘sub-prime crisis’ had caused plenty of headaches for the finance
industry and some sleepless nights for him, the ripple effect may
be less dramatic.
The cost of Blue’s funds is linked to a blend of financial
instruments, including the one to two year swap rates, which have
recently fallen by around half a percent. After the highs and lows
of the last quarter, the company has taken the opportunity to
launch a more attractive risk to reward product. “We had always
planned a major revamp of our products in October and in spite of
the uncertainty within the financial markets we agreed to continue
to do this,” Critchley said.
In fact, Critchley added, Blue is looking to widen the credit
risk associated with its products by launching a fourth tier,
having previously operated three tiers: “With arrears exactly where
we predicted they would be at this point and no surprises within
our credit curves, we are confident that we can expand our product
range to enable more customers to purchase a vehicle.” He went on
to say that the business does need to be more aware of customers’
total indebtedness, due to potential increases in mortgage rates
and the end of fixed terms, but that Blue is confident of its
calculation on income to outgoings – which have proved to be a
constant indicator of whether a customer can afford the repayments
on a loan. Critchley is confident that Blue’s business model will
continue to function, and to provide the funder with excellent
prospects for expansion and profit in the future.
Greg Stevens, corporate and regulatory affairs director at
Cattles said that while arrears levels “have ticked up slightly”,
trading is “in line with current expectations” and Cattles expects
to grow again next year (see p??? for Cattles’ H1 results). He
draws a distinction between the US sub-prime segment, which
included the unemployed and others with no income stream, and
lending practices in the UK: “I cannot think of a UK company that
would lend to the bottom rung of the US sub-prime segment.”
The silver lining?
Cottle of Capital Bank pointed out that there may even be a
silver lining to the current unrest for point-of-sale finance
providers: “Direct lenders have been just as affected by interest
rate rises and rising arrears as any motor finance provider.”
Direct lenders who depended on sales of insurance to shore up
attractive rates have not been selling as many add-on products as
they might have hoped, Cottle said, adding: “In a difficult market,
the extra choice and flexibility that we can offer through dealers
– HP, PCP, personal contract hire and so on – makes our products
more attractive in times of belt-tightening.” The task is to ensure
consumers are made aware of showroom offerings before they start
their search for finance, he added.
Also, as stocking finance costs rise, Cottle predicted that
dealers – with an eye on falling car margins – will come to realise
even more keenly the importance of talking about finance and
insurance to carbuyers. The motor dealer sector, which has seen
many ups and downs in past decades, is “very resilient”, he
observed, although there have recently been a handful of dealer
failures – but “not on a major scale”.
Critchley commented: “One prediction is that the non-prime
market will grow from 42 per cent of borrowers this year to 48 per
cent next year. With more lenders looking to improve margins by
reducing the bad debt associated with customers with impaired
credit, we have seen an upsurge in dealers who want greater
exposure to this target market.” Stevens pointed out: “The retreat
of the banks from the pool of credit-impaired borrowers will push
more people into the non-standard sector.” He added that Cattles
only writes “10 out of every 100 credit applications” and insists
on face-to-face meetings with would-be borrowers before it agrees
to lend.
Williams pointed out that over the past few years, events such
as the Iraq war and the terrorist attacks of September 11 2001 have
had a big impact on markets, but that adjustment has been
relatively rapid. “Confidence has been restored quite quickly,
which suggests that we have a pretty strong infrastructure, and are
able to ride out these issues,” he said.
September registrations rise
Despite concerns over consumer confidence due to the banking
sector’s difficulties, demand for new cars rose in September. A
modest decline to 405,000 units had been expected in this key
‘plate change’ month, but volumes were actually the best since
2004, at 419,290 units – up 1.3 per cent year on year
Source: SMMT
