conspiring to bring changes to motor dealer stocking finance. These
include ongoing industry consolidation, software development and,
more bizarrely, the current credit squeeze. Brian
Rogerson examines the market.
The bigger groups break the mould
Go deeper with GlobalData
Industry consolidation has been a principal driver in changes to
the way stocking finance (SF) is delivered to the market in recent
times. Tony Allen, business unit director of APAK Group, whose SF
system is widely used throughout the industry, explains: “Perhaps
the most significant change in the sector has been the evolution of
the major dealer groups. Their presence and growth has served to
reduce the influence of the manufacturers’ captives over the
dealers.
“Where in the past the captives would have supplied
all the new and consignment stocking, and thus have almost complete
control over the finance of the dealer network, the large dealer
groups now have a lot more bargaining power and can exert pressure
on the captives,” Allen continues.
Whereas not so long ago it would have been unthinkable for
franchised dealers to adopt SF from anywhere other than their
franchisers, there is increasing evidence of dealer groups now
going to the open market to get the best finance deal once the
manufacturer’s interest-free period is up.
“This, of course,” Allen says, “is now playing into the hands of
the independent finance companies who are able to fund vehicle
stock much earlier in the life-cycle than was traditionally the
case.”
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By GlobalDataThe Retail Automotive Alliance (RAA) is a corporate identity
formed in 2003 consisting of 20 independent motor dealer groups.
Collectively, the RAA is a very big player in the UK marketplace
with a combined turnover of £2.3bn, which places it second only to
Pendragon in the UK retail motor industry turnover league tables –
and gives an indication of the group’s enormous buying power.
Since its formation, apart from negotiating preferential deals
with parts suppliers, oil companies, insurance providers and used
car auctions, it has also established arrangements with Bank of
Scotland Dealer Finance (BoSDF) for all-product support. This led a
spokesman for BoSDF to comment on the “terrific increase in levels
of business we have seen with RAA members since 2006”.
A rather different product
Once perceived as a drab, grudgingly-offered
gracelessly-accepted but necessary part of a motor dealer’s working
environment, SF is nowadays a far more sophisticated multi-purpose
product.
Toyota Financial Service (TFS) typically funds in excess of
£300m of vehicles at any one time for its Toyota and Lexus
franchised dealers. Paul Waters, centre funding credit manager at
TFS, tells Motor Finance that since establishing its own stock
finance systems in 2003, which had previously been outsourced
through Black Horse, the company has expanded its range of products
to include a full portfolio of dealer support.
“Through our Centre Funding department,” he says, “we are able
to provide new and used car stocking as well as lines for
demonstrator, courtesy and rental cars. At Toyota every single new
vehicle for sale goes through our system. We can also make
available mortgages for property purchase or development as well as
corporate identity loans and funding for all types of ad hoc
equipment needed in the modern car dealership.”
Stephen Dawson, associate solicitor at Shoosmiths,
heads a team which advises on retail and stocking finance. He
confirms that the principal structures of SF most commonly seen are
unit stocking, term loans, overdraft, advance commission and
advance-on-advance (the latter two being where a dealership
anticipates its annual commission earnings and receives sums due to
it early).
“What appear to be less popular at present,” he says, “are term
loans secured by property. We are noticing that at present, lenders
are less likely to seek security with bricks and mortar than
previously. It is unclear whether this is due to the costs of
completing the security or because dealers are less willing to
offer SF on this basis.
“Unit stocking plans nowadays are very popular. The technology
behind them is so developed that the process requires a lot less
paper. However, despite their sophistication and their variety of
operation there is still the possibility of a vehicle being sold
out of trust or double funded. The fraud factor can never be
removed entirely.”
What – no retail support?
The vexed question of SF products standing alone without retail
support is back in the frame with reports that GE Capital has
launched a SF plan which is offered without the reciprocal need for
retail support from the dealer. Such unlinked schemes cause regular
automotive lenders to scratch their heads in disbelief.
It should be added, however, that SF linked to retail support
does not always enjoy unmitigated support from dealers. One dealer
principal tells Motor Finance that problems arise when lenders
increase their rates or tighten their terms. The accusation is that
when lenders’ retail packages become “uncompetitive” in the
marketplace, and customers opt elsewhere for cheaper or more easily
obtainable deals, then the stocking finance charge comes at a
premium price.
Stephen Dawson says: “There has always been a linkage between SF
and retail return, whether or not it is widely advertised by the
lender, and there are signs emerging that the linkage is becoming
popular again. I was recently requested by a non-captive lender to
draw up a dealer agreement that included retail return. We are also
looking at the idea in more detail for other captives.”
However, the suspicion remains that unlinked SF will command a
premium price in the marketplace. Lenders invariably offer
stand-alone SF at a premium charge – often as much as three or four
percent above Finance House Base Rate.
Waters stresses: “Although we would always prefer to obtain
retail support for our SF, if the product makes commercial sense
then we will go ahead with it.”
Hugh Denton is wholesale relationship manager with Black Horse
Motor and Leisure Finance (Black Horse). Black Horse has new-car
joint venture SF arrangements with Suzuki, Lotus, Proton, Hyundai
and Shogun as well as many caravan manufacturers. Although having
offered used-car stocking for a number of years the lender’s
commanding size in the UK car sector has warranted the formation of
a used-car SF plan, Successor.
He explains: “Dealers purchase their used-car stock in the usual
way by auctions, trade or part exchange, and must be loaded on the
system within 30 days of purchase. We value the vehicle against CAP
and usually advance the dealer up to 80 per cent of the cost. They
then have up to 150 days in which to sell the unit and repay the
amount owed.”
The title of each vehicle remains with Black Horse until the
vehicle is sold which Denton believes gives dealers greater
flexibility and helps to reduce the additional costs associated
with secured lending products. However he adds: “We always seek to
link the SF to retail support.”
The international dimension
Fimasys is a French-based software company which has recently
expanded throughout continental Europe and recently opened an
office in the UK.
James Powell, Fimasys’ business development manager explains
that the company offers SF to the automotive subsidiaries of Crédit
Agricole and Société Générale in several European countries
including recently in central and eastern Europe. In the UK, the
company has implemented its SF system, Pro-Finance, with Honda
Finance UK.
In continental Europe motor dealers’ requirements bear much
comparison to those of the UK. Powell says: “Our system covers the
funding of vehicles on consignment and manages courtesy and
demonstrator cars. It can stand alone independently of dealers’
retail support and independently of manufacturers’ plans. Some
schemes have corporate branding arrangements with manufacturers and
also offer their own branded products to dealer networks.”
The impact of the credit squeeze
Although it is still early days, industry opinion seems to
confirm that the current restriction on credit and subsequent
shortage of liquidity will have a positive impact on demand for
SF.
“In the current climate,” says James Szerdy, banking and finance
partner at DWF, “the motor sector is generally not attractive to a
number of banks. Where standard working capital and other clearing
bank facilities are becoming increasingly restricted, and more
expensive, wholesale SF can provide dealers with extremely good
loan-to-value funding ratios as well as generous funding periods.
This inevitably assists liquidity and stock management.”
Szerdy stresses that, given the current financial climate, he
believes it inevitable that dealers are likely to see an increase
in the cost of these facilities and, equally inevitably, a greater
use by lenders of non-utilisation fees.
Waters says: “There is every indication that dealers are seeking
extra funding at the present time, especially since banks are
tightening their lending and are not prepared to lend on their
previous rates and terms. Specialist providers of SF are an
integral part of meeting dealers’ cash flow requirements and with
the tightening credit market there is every indication that dealers
will be calling for extra support from stock financiers who will be
in greater demand in the foreseeable future.”
“If the credit squeeze leads to consumers cutting spending on
cars,” Tony Allen adds, “there will be a build-up of stock in
showrooms. In such circumstances, SF lines will be crucial in
supporting dealers through a period of slowdown. We are also likely
to see increased auditing by lenders in the future.”
Andrew Denton, sales and marketing director at CHP Consulting
believes that SF has much development potential during the credit
squeeze. He observes: “If we define SF correctly – as working
capital finance – then you can envisage factoring being included in
the product. It is good lending practice. I think instead of
stocking being a means to an end for the lender (such as obtaining
retail finance) it is likely to become of far greater significance
for the borrower. For the future every means of moving assets will
become ever more crucial.”
New developments
Tony Allen is looking forward to new additions to APAK Group’s
wholesale stocking system. He says: “We are planning the ability to
collect finance lease and rental agreements. Also new legislative
issues are ever present and Basel II requires greater accessibility
for auditors to information relating to regulatory compliance.”
Paul Waters’s team is in the final stages of developing an
automated used-vehicle funding product which is, as yet, unnamed.
“The dealers’ management system will forward relevant vehicle data
to our SF system every evening,” he said. “New vehicles are added
to the scheme and sold ones are subtracted. An automatic credit or
debit is activated through the banking system the next day for the
aggregate difference.”
Meanwhile Hugh Denton’s team is developing further its Batch
Used Inventory Funding for its car supermarket customers. Black
Horse currently deals with five car supermarkets including
Motorpoint. An integral element of car supermarkets’ success is the
committed use of point-of-sale finance and rapid turnover of
stock.
“As you can imagine,” he says, “volumes are big and standard
systems can not cope with such numbers of stock movement. The
dealers forward us a daily snapshot of their stock which is fed
onto our APAK system and stock payment adjustments are made on an
aggregate basis daily.”
Dealer stocking securitisation – a way
forward?
It is some two years since the €850m (£595m) Cars Alliance
Funding plc securitisation of Renault and Nissan dealers stocking
credit lines won an award as the “Most Innovative Asset-backed Deal
of the Year”. Since then the market for securitising SF lines seems
to have remained quiet, certainly in Europe.
And yet they seem to make sense. Securitised dealer SF loans
usually have prime-based floating rates and are revolving – dealers
can repeatedly borrow and repay part or the entire credit limit.
Because the loans are collateralised by vehicles in stock, floor
plan loans experience low loss rates and enjoy high repayment
rates.
In the US floor-plan securitisations are structured much like
credit-card securities and incorporate a revolving period, an
accumulation period and a “bullet” principal repayment. Floor plan
securitisations have unique investor protection features based on
the nature of the security, such as provisions to repay investors
early if the dealer has an abnormally high concentration of used
cars in stock.
“It is a particularly complex market and the auto-backed
securities deals we hear about are painfully detailed and costly to
structure,” Shoosmiths’ Stephen Dawson explains. “This market is
going to see some challenges as historic structures are re-examined
and new structures considered. These deals clearly depend heavily
on the volume and quality assets backing the structure; both of
these requirements of quality and volume may be difficult to locate
in the short term.”
Nordea goes live with APAK
Nordea’s Specialised Financial Services (SFS) has adopted APAK’s
wholesale finance system (WFS) across the four countries of its
Nordic region – Denmark, Sweden, Norway and Finland.
Jukka Salonen, head of SFS told Motor Finance that
in 2007 Nordea financial services had a loan portfolio of €13.3bn
of which €8.1bn represented new sales. A total of 513,000 assets
comprise its book of which around 231,700 are cars. The company
also has a joint venture with ALD Automotive in the Nordic region
and ownership of ALD Baltic in Estonia, Latvia and Lithuania.
As part of its strategy to expand its asset-finance business,
initially amongst its supporting motor dealer groups, Salonen
explained that the company (which previously utilised a
factoring-based stock funding plan) required a sophisticated unit
stocking facility that would enhance wholesale finance service for
its customers.
Nordea SFS’s retail automotive relationship is pre-dominantly
with multi-franchised dealers and the company works with importing
companies to provide manufacturers’ branded services for dealer
groups. In short, it provides retail and stocking finance in the
absence of manufacturers’ captive packages.
Salonen said: “Following an extensive selection process APAK was
chosen for its in-depth knowledge of automotive finance which was
gained from its long-term experience of implementing stock finance
systems. WFS provides customers with a web enabled, fully
integrated stock finance system in their own language – and via a
web browser.”
He added: “Importantly, WFS interfaces with the company’s
international payments system, Corporate E-Gateway, which automates
all incoming and outgoing payments from one centralised point
across all countries. This gives Nordea customers the choice of
using direct debit or instigating payments themselves. Regardless
of the payment method, WFS supports the automatic allocation of
funds.”
Equally crucially, Salonen explained that WFS is set to act as a
platform for growth and extend into the non-wheeled asset sector as
well as commercial vehicles. “Nordea is a company which prides
itself on its high degree of technology usage,” he said, “and
APAK’s sophisticated use of technology matched our
requirements.”
Motor Finance Issue: 42 – April 08
Published for the web: April 23 08 15:31
Last Updated: April 24 08 14:20
