First banks, then mortgages, now will we see calls for car finance to be guaranteed?
There are a lot of people moaning about how the banks are tightening their hold on the Australian mortgage market as non-bank lenders vanish, cut back activities or get taken over.
But they have missed an equally dramatic collapse of non-bank finance for the slumping Australian car industry.
The lobbyists and other coat tuggers for the non-bank mortgage industry (which include M. Turnbull) have managed to frighten the Rudd Government into pumping $8 billion into the sector to buy non-bank generated securitised mortgage securities. They seem to have forgotten to ask how the non-bank sector will generate $US8 billion in home loan mortgages as their share of the sector has collapsed.
Perhaps Westpac, which owns RAMS, and the Commonwealth, which controls a third of Aussie Home Loans, and the NAB, which is about to buy Wizard from GE Capital Australia, will find a way to affix themselves to the public teat, in the name of “good public policy” of course.
But what of the car industry and the exit of major financier GE and GMAC? Together they are the largest non-banking lenders to the industry and they will be gone by the end of the year. They finance more than 600 dealers across the country in either new and used cars, or just used cars. They also finance vehicle fleets for companies larger and small. All is being wound back.
Crikey yesterday reported GE’s decision to exit car financing (as well as home mortgages) and GMAC revealed it was leaving as part of a worldwide announcement from the struggling US parent.
GE’s decision to wind back its home lending and car financing and exit Australia in the coming months is another example of the same mind set. It wanted access to the Federal Government’s guarantee scheme and had lobbied the authorities for access.
It’s parent in the US has the same credit rating as Australia, triple A, but wouldn’t hand over the capital to allow the Australian arm to remain in business in mortgages and car loans.
The US parent has been hurt in both products, especially mortgages, where losses and write-downs are approaching $US4 billion. The local arm will concentrate its reduced capital on its private credit card and person loan business.
GE told Crikey yesterday:
Due to the rising cost of finance bought on by the turmoil in world finance markets, we’ve been implementing ways to reduce our exposure for a while across the business – including motor. As a result we have been terminating agreements with some retail and wholesale motor partners over the last few weeks.
A few other examples across the business have been reassessing our loan to value mortgages, cutting our fixed rate mortgage options and flexible options prime mortgages since August and also tightening up on cash limits for financially stressed card customers and reducing eligibility for credit limit increases.
And overnight we learned that GE’s Customfleet had ceased providing finance for fleet vehicles this week in Australia as well.
That’s a significant move as Customfleet (which used to be part of the NAB) was a major funder of car fleets via a variety of leasing plans. NAB sold the Customfleet vehicle fleet management and leasing business to GE for $550 million in May 2006. GE is understood to be staying in the fleet management business for the time being, but it will shrink as the number of leases runs down.
And GMAC confirmed yesterday that it was leaving Australia. Media reports quoted a spokesperson who said the company would wind up on December 31. Like GE, it blamed the credit freeze and the rising cost of funds.
Unlike GE, GMAC is owned by two groups with no credit rating worth talking about and very little in the way of raising new money.
GMAC is 51% owned by the Cerberus private equity of the US (which owns 80% of the struggling Chrysler car making business) and 49% by the troubled General Motors group of the US.
The company is slashing offices all over the world, especially in the US because of its own financial problems flowing from unchecked expansion into subprime mortgage lending on homes, and then cars. the home lending and associated investments have cost it $US4.3 billion as Cerberus and GM had to bail it out a few months ago.
GMAC has a US bank inside its business group and regulators had threatened to close it down if the partners didn’t recapitalise the company and especially its mortgage black hole known as Rescap.
The massive losses on mortgages left GMAC weak and unable to cope with the financial impact of collapsing car sales, and falling car values, which have caused huge losses on car leases. Up to a few weeks ago 94% of all private car sales in the US were made by lease (including “subprime leasing”).
Chrysler’s finance arm has quit leasing and GMAC has tightened its lending criteria so far that it will only lend to prime rated borrowers, (with US credit scores of 700 or more on the Fico scale).
So when will the Australian media, led by The Australian, start campaigning for car dealers and buyers to get a bank guarantee?
So it’s done – GE and GMAC depart from the Ozzie shores and leave our already ailing MV Industry momentarily , ‘on the rocks’. From what I understand the Toyota dealers ( in the main ) all have arrangements with TFA ( Toyota Finance Australia ) – Those Toyota Dealers that don’t will no doubt be at TFA’s front door knocking to come in. If their financials support them I expect they will be saved. Then we look at the other 4 players. Esanda – St George – Ford Credits and Capital ( Bank of Scotland ) –
I suspect this ;
Each of the 4 ( maybe soon only 3 , as one is yet to play their hand here ) will examine their current book and determine who they want to retain and those they would prefer to let go. Then replace as they choose the ‘sacked’ Dealers with more profitable operators / franchises from those departing GE and GMAC. Of course this will still leave some number of Dealers ‘out in the cold’ – ie., those not wanted by the 4 (3) remaining financiers and those ‘sacked’ – replaced by the more desireable / displaced by GE and GMAC.
Desireability will be determined by current Dealership liquidity , profit performance supported by strong balance sheet results over time , current net worth and available securities will be the measure (of acceptance). That together with an overall balanced trading pattern and a better than just average generation of measured and budgeted sales incomes , supported by sensible overhead cost reductions in the production of measured net pre tax profits % to total sales. That without doubt will be the measure.
Having put that scenario , the new terms and conditions for trading will see all Dealers at the mercy of their ‘new’ or even current financier. With competition for Dealer business minimised to 3 or 4 major players a monopoly situation is sure to develop. ” We’ll take you in but on these terms ” – either way there will be pain. The result ?, we will see less Dealers. An overdue rationalisation of franchised stores.
Gary I cant believe the mainstream media has not picked this up. My mail is that the 500 odd dealers effected by the ge/gmac pull out are going to find it difficult to get refinanced. Capital finance cant do it, esanda wont do it,st george the same. Leaving only 1 merc-benz finance to do them all????. By the way 500 dealers X ave 2 million each = at least $1billion!!. who will give that much to struggling car dealers at the moment??? Work it out even if say 200 dealers do manage to get the funds that leaves 300 dealers each with at least a average of 30 employee= 9000 people unemployed plus the flow on effects in small communities around Australia