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Liquidity issues
Just as customers are finding it harder to get credit, so, too,
are motor finance companies, with access to well-priced funding a
“core concern” for the FLA’s motor finance members, Harrison says.
“Funding arrangements vary from lender to lender, but managing
liquidity is a high priority for all,” he comments.
This inevitably has an impact on the amount a finance house is
willing – or able – to lend to consumers. “Lenders are more closely
scrutinising all the deals they write, particularly marginal deals,
and are reviewing non-core lending within their businesses.
However, I would emphasise that credit is still available in
showrooms,” Harrison adds.
Toyota Financial Services’ Betteley sums it up thus: “Rate
spreads of wholesale funds have risen considerably. The dilemma is
between short-term and long-term borrowing – if you borrow
short-term, say overnight, you have to pay back and re-borrow the
money, which is fine as long as you can replace the credit; the
problem for many in a credit crunch is that you borrow money but
can’t pay it back or pay it back but can’t replace it. If you
choose to borrow on a long-term basis, you pay a premium, but
short-term borrowing is riskier.”
BMW Financial Services’ Schooling concurs. “The issue comes back
to funding – to banks lending to other banks, and to major
corporates. The market needs cash to be freed up, and interest rate
cuts to be passed on,” he says.
The recent pre-Budget report, in which the Chancellor, Alistair
Darling, announced that VAT would be cut to 15 per cent as of
December 1, should have a positive effect on car sales, but
Schooling is unsure whether the VAT medicine will be enough to get
cars moving through showrooms again.
“The VAT cut will make a difference for sure [in stimulating
retail demand]. But will it be enough to convince people waiting to
change cars? The unfreezing of capital markets would be better – in
order to get the corporate world back to normal. The PBR didn’t
really help with that,” he says. “The focus on VAT is logical but
whether it’s enough is another question.”
When the Bank of England’s Monetary Policy Committee decided to
cut interest rates to 2 per cent in early December, the news was
greeted with relief by motor retailers.
Sue Robinson, director of the RMIF’s National Franchised Dealers
Association, commented at the time: “The Bank of England’s decision
to further reduce the interest rate is positive news for consumers
and business, but it is vital that the saving is passed on to
restore confidence in the marketplace. Consumers and business will
feel more confident in the economy once they feel the effect of a
lower cost of borrowing.”
For motor finance companies, the lower cost of funding is not
being felt immediately – meaning that their ability to offer
finance at lower rates to consumers is still constricted.
Schooling states: “The recent interest rate cuts unfortunately
do not translate directly into a cut in our cost of funds,” while
Sutton observes: “People are now starting to understand that even
though headline interest rates have come down, the actual cost of
providing credit has gone up in terms of requirements for capital
provisions, the cost of capital, the increased expectation of bad
debt, and so on, meaning that to the consumer, credit is more
expensive than it was 12 months ago.”
Peter de Rousset-Hall, the former CEO of Ford Motor Credit and a
director of Woburn Consulting, says some finance houses are
better-prepared than others to weather the storm. “Companies with
access to cash and funding are well-placed at the moment, those
that have neither will struggle; the survivors will be the ones who
manage to hold on for three years or so,” he says.
The temporary suspension of the securitisation market is also
causing huge headaches for finance houses – especially captives, he
notes. “Captives are supported by their parents but by definition
have to be highly geared in order to be in the lending business.
Their parents aren’t especially cash-rich at present. The way
around that problem a year ago was securitisation, but that is now
very, very difficult,” de Rousset-Hall observes.
“That’s a shame, as many auto sector securitisations were very
clean and straightforward – you had clear assets which were clearly
identifiable, with a strong responsibility by the initiators to
make sure the assets performed well; it’s what happened down the
line which caused problems.”
For captives, sterling’s current weakness – with the pound
recently falling to a new low against the Euro – has the potential
to act as another brake on consumer financing activity. As Allen of
Panmure Gordon points out, “why would you offer 0% finance if you
build a car in Euros, then sell it in pounds for a 30 per cent
discount, then make a loss on financing the vehicle?”
Supporting dealers
The motor retail sector is, by and large, having a very tough
time of it. The big PLC chains have all announced cost-cutting
measures – Lookers has closed several underperforming sites,
Inchcape has issued a profit warning, laid off 1,900 staff and is
in danger of breaching its banking covenants next year, as is
Pendragon, which is reportedly in talks with its bankers about
asset sales or a possible debt-for-equity swap.
The larger groups are in a precarious position, Allen says:
“Rapid dealer consolidation over the past five to six years has
been done by debt, and it will take a while for PLCs to gear up
their balance sheets again, causing consolidation to grind to a
halt. Lots of private dealers will go under, but regional players
might do well; selling cars isn’t like selling other consumer
goods. People get their groceries from Tesco as it has mass-market
appeal – but in motor retail it’s the opposite.”
For captive motor finance houses, supporting the franchised
dealer network is one of their primary raisons d’être. And as
dealers see sales fall but funding costs rise, this is not easy in
the current climate.
Lower interest rates are easing the pressure somewhat – a factor
that may improve further, as commentators predict rates could be
set as low as 1 per cent in the first quarter of 2009 – but it is
inevitable that more retail sites will go under, adding to a
growing tally of recent closures.
“It’s a very difficult market for dealers at present, and there
have been some dealer failures, to which we have exposure as we
provide wholesale funding, so that’s something we need to keep a
very close eye on,” Betteley says. “Captives will however support
their network through difficult times and make improvements to
wholesale funding arrangements – TFS was the first captive to pass
on rate reductions in September, for example. As we get access to
lower rate funding we are passing this on to help dealers sell
cars.”
Captives, Betteley believes, must work with dealers and
distributors to ensure there is “joined-up thinking”. He adds: “All
dealers are suffering from reduced sales and margins, and we as a
captive can take a longer-term view, adjusting and extending credit
to look forward to a time when the situation will improve. However,
banks and independent funders have shareholders to satisfy in the
short term so cannot take such a long-term approach.”
As a finance provider which is also “in it for the long term”,
Sutton says that Black Horse is seeing a slight change in the
balance of power between lender and dealer, with positive
implications for motor finance providers.
“We’re coming out of a situation where the returns made by
finance providers have been very low, and relatively uneconomic.
The balance between dealers and finance companies is now starting
to shift more in favour of lenders, and that’s not a bad thing.
It’s not about making excessive profits, but rather a modest and
reasonable return – which certainly has not been the case over the
last two to three years,” he says.
Sutton knows that dealers are in a somewhat difficult position:
“Dealers are squeezed on both sides, and we do understand that, but
the two sides [i.e. lender and retailer] both have to exist in
order for the system to work. We’re not yet making reasonable
returns, but we’re getting there, which makes it easier when going
to our parent bank and talking about the funding requirements of
the motor finance business.”
This could, over time, perhaps lead to the re-entry of
bank-backed finance divisions which have exited motor finance in
recent years – although it is hardly likely that new entrants will
be tempted to the arena for some time to come, in view of the high
cost of funds, and the worsening economic outlook.
Looking to the future
The general feeling about 2009 is that it will be tough – even
tougher than 2008, especially during the first half. Interest rate
cuts will take some time to filter through to consumer credit, and
the easy availability of credit which characterised the past few
years has disappeared.
Harrison comments: “December’s Bank of England base rate cut of
100 basis points will help boost confidence and hopefully reduce
the cost of funds, but this will take time to filter through. The
FLA is calling for the government to do all that it can to free up
the financial markets and ensure that credit is available to
businesses and consumers. If no action is taken and the status quo
is preserved then the cost and provision of PoS motor finance will
ultimately be hit.”
Sutton’s personal view is that “the first half of 2009 will be
very tough” – although he hopes to see signs of a recovery around
the half-year mark.
De Rousset-Hall points out that current bearish trends in
setting RVs may well translate to increased profits a few years
down the line: “People are writing much lower RVs at the moment, so
when the cars come back in three years’ time, there’s the potential
to make a fortune on them.”
However, things will get worse before they get better, he
predicts: “We’ll see a wave of dealer bankruptcies in February and
March and values may come down even further due to forced sales.”
The collapse of a major retail chain would be “disastrous” for
motor financiers (and fleet lessors), as fire-sales of liquidated
stock would have a “massive” dampening effect on overall market
values, says one insolvency expert.
New car sales are predicted to fall in 2009, with estimates from
the industry experts surveyed by Motor Finance ranging
between 1.5m and 1.9m units. But, as one financier said, sales of
1.7m still translate to 1.7m opportunities to sell finance.
Dealers must look to finance and insurance sales in order to
boost the bottom line, says Harrison. “A key challenge for dealers
in 2009 is diversification. Dealers cannot rely on new car sales as
their main source of income. Finance and insurance will be
increasingly important to generating income,” he states.
One way dealers could add value to customers is, he thinks, by
offering one total monthly figure covering maintenance and
insurance as well as the cost of the credit. “Convenience is key
for consumers, who may have a set monthly budget,” he says.
Offering customers a personal contract purchase (PCP) product is
another way to fix monthly outgoings, which could gain in
popularity during a liquidity squeeze. Schooling says: “We are
seeing an increase in customers’ propensity to take funding.
There’s a strong performance for our PCP-type product, BMW
Select.”
Selling the predictability of PCPs could be a good marketing
tool, he adds: “If people are only earning 1 or 2 per cent on their
savings, they might be more inclined to use the money to reduce a
funding charge with interest attached. But on the other hand, they
may prefer to have a nest egg as the economy worsens. Someone who
feels nervous about their financial situation could be tempted by a
PCP product which fixes outgoings and is more advantageous than a
bank loan.”
Sutton adds: “We’re generally seeing a slight trend in favour of
PCP-type products, especially among younger people, but it’s not
that pronounced, and our product mix is pretty much the same as it
was 12 months ago.”
While the outlook for new car finance is not especially rosy,
though, opportunities exist in other sectors. Black Horse operates
in both motorcycle and caravan finance, both of which are holding
up well, Sutton reports: “In motorcycle finance, where we have a
very high market share, business over the last two to three months
in particular has been very strong – it’s one of the only areas
where we are doing business in line with the volumes we anticipated
at the beginning of the year. We’ve had the same experience in the
caravan market, and this is partly driven by manufacturer campaigns
aimed at ensuring that they don’t go into the winter with too much
excess stock.”
On the other hand, demand for finance for vans and light
commercial vehicles has fallen, says Janet Wilson of Close Motor
Finance. “We have noticed that our LCV business has dropped off,
though. This business is mainly sole traders who are probably being
affected by the economic downturn,” she comments.
Hope for the future
There is room for hope, but motor finance providers must tighten
their belts in preparation for a period of fasting, after the
credit boom of the last decade.
“The root cause of previous upturns was credit availability; the
previous upturn was allowed to continue for too long, so getting
out of this downturn will be difficult. The government should have
acted much earlier than it did, and as a result we are in for a
long, hard slog,” says de Rousset-Hall.
But he insists that motor financiers should look on the bright
side: “If there are 49 good customers for every bad customer in
prosperous times, there are still nine good customers for every bad
customer during a recession – meaning there is still plenty of good
business to be done.” And as the balance begins to swing back
towards funders, and as PoS penetration rates rise, he may just
have a point.
