U.S. auto dealer floor plan (DFP) ABS trust performance metrics and ratings will remain stable heading into 2017, according to Fitch Ratings.
Auto sales dipped in 2016, and manufacturers used a combination of higher cash incentives and 0-percent financing to entice consumers into showrooms. Incentives rose each month going back to early 2015 and were close to $3,900 per vehicle in September.
These sales tactics will continue to eat into dealer profits and push down used vehicle values into 2017. However, dealer profits remain healthy at a lower level, while overall dealer costs, including capital financing costs, stay low.
Fitch's Auto DFP ABS MPR index averaged 38.2 percent through the September distribution period, versus 41.3 percent recorded for full-year 2015. Slowing sales and creeping inventory levels drove the decline.
The 3-month average MPR in the Ford Credit Master Owner Trust was down marginally through September on a yearly basis, but comfortably within historical levels. General Motors Financial Master Owner Trust DFP platform's MPR was fairly stable last month and also within historical levels.
Dealer profits appear to have plateaued and come off their peak. The National Automobile Dealers Association reported dealer profit levels declined 4.1 percent (pretax) through second-quarter 2016 compared with second-quarter 2015. Dealers' return-on-equity for first half of 2016 was 31.3 percent, compared to 33.5 percent when sales peaked a year earlier.
Importantly, none of the outstanding DFP ABS trusts have any losses or dealer defaults over the past year, as dealer health is still fairly robust, despite some metrics slowing as mentioned, the majority of dealer networks are all in good shape financially.
The number of dealers also remains at a far lower level than the period leading up to, and during, the most recent recessionary period when there was a clear oversupply of dealers - particularly for U.S. networks that issue DFP ABS. Manufacturers are clearly not looking to add dealer locations and this will bode well for the existing dealer networks.
Fitch's outlook for the sector is stable for asset and ratings performance. Fitch currently rates seven DFP ABS trusts issued from 23 outstanding series totaling $17 billion.