Players in the subprime auto market are expecting some deterioration in 2021 as concerns shift from the economic uncertainty brought about by the pandemic, to regulatory uncertainty ushered in with the new presidential administration, according to the third annual market study released by Davis+Gilbert LLP’s Credit Chronometer.

The report stated the potential for heightened regulatory scrutiny is weighing on market players.

Authored by Davis+Gilbert partner, Joeseph Cioffi, the Credit Chronometer report “Moving On from 2020, a 360Market Study of Subprime Auto Participants” summarizes the results of an anonymous study of over 100 originators, investors, servicers, trustees and other securitization market participants, on topics such as credit quality, the sufficiency of credit enhancement protections and the ability to obtain and maintain desired credit ratings.

With a new administration has come a new concern, the report showed. Participants see potential regulatory enforcement or new regulations as potentially dampening enthusiasm for new originations and ABS issuances, according to the report.

“Throughout the pandemic, participants have remained cautiously optimistic and their confidence in deal structures and credit extensions remains relatively strong, but the potential for new regulation is putting a chill on the sector,” said Cioffi.

Key findings of the study include:

  • Fewer participants expect downgrades.
  • Anticipation remains high for the same level or more credit extensions going forward.
  • Rate caps, debt collection limitations, and the CFPB “changing the rules of the game” are market risks weighing on participants.
  • Subprime lenders becoming subject to an “ability to pay” law is a major concern.
  • A majority of investors expect the pandemic to have a lasting negative effect on their participation in subprime auto securitizations.

 

The comprehensive report compares 2021 survey results to 2020 responses, tracking evolving opinions toward credit enhancement, credit quality and deal performance.

Ford Motor Co.. said adjusted earnings before interest and taxes (EBIT) for the second quarter of 2021, which ends in two weeks, will surpass its expectations and be significantly better than a year ago.

The company provided the insight ahead of president and CEO Jim Farley’s participation this afternoon in Deutsche Bank’s Global Auto Industry Conference.

Farley was set to tell conference attendees that Ford is seeing improvement in its automotive business since providing full-year operating guidance on April 28, despite continuing uncertainty about supplies of semiconductors. The improvement in automotive is being driven by lower-than-anticipated costs and favorable market factors. Additionally, higher vehicle auction values are benefitting Ford Credit.

Net income for the second quarter of 2021 is expected to be substantially lower than a year ago, when results included a $3.5 billion gain on Ford’s investment in Argo AI.

Ford plans to announce second-quarter results and provide its outlook for the second half of the year on July 28.

The National Association of Manufacturers, the U.S. Chamber of Commerce and the American Investment Council recently launched the Coalition for America’s Interest, to unite trade groups in support of Congress to extend the current EBITDA (earnings before interest, taxes, depreciation, and amortization) standard.

This allows businesses to continue to access capital and have flexibility to meet their business needs, ensuring businesses have the flexibility and access to capital they need to remain competitive, continue adding jobs, and navigate the current economic and health crisis. 

 Under current law, the maximum deduction for interest on business loans is limited to 30 percent of EBITDA, a common financial accounting metric used to evaluate a business’s economic strength and ability to service debt. This standard will become far more restrictive in 2022, dramatically increasing the tax liability and financing costs for many capital-intensive businesses. This change will make it difficult for these businesses to raise capital for investment, while constraining their operating budgets and their ability to hire and keep workers – ultimately threatening small businesses, jobs and economic growth.

New research from IHS Markit shows that the average age of light vehicles in operation in the U.S. has risen to 12.1 years this year, increasing by nearly two months during 2020 and elevated by the COVID-19 pandemic. The increase in average age will further drive vehicle maintenance opportunities from an increasingly aged vehicle fleet.

COVID-19 and its impact across the U.S. caused a drastic reduction in new vehicle sales as well as a sudden increase in vehicle scrappage, which was a catalyst for increased velocity in the growth of the average age of light vehicles. The pandemic-induced rate of increase in average age is expected to be short-lived as 2021 will see a return of new vehicle registrations and increased activity in used registrations as we adapt to post-pandemic norms.

Vehicle Miles Traveled declined year over year by over 13 percent in 2020 due to lockdowns and work from home policies. Typically, an increase in scrappage rate would be expected to be a headwind to average age. But coupled with the lower new vehicle sales and reduced vehicle miles traveled, the combined impact proved to be a tailwind.

According to the analysis, the rate and mix of vehicles leaving the population point to the possibility that the volume may be inflated due to a larger percentage of vehicles that may not have been registered due to lags in state requirements for registration renewals, more vehicles being put into ‘storage’ due to COVID-19 restrictions in many locations and work from home initiatives.

According to IHS Markit analysis, the ongoing microchip shortage is expected to continue to challenge new vehicle production volumes through the fourth quarter 2021, but rounding out the year, IHS Markit expects U.S. light vehicle sales to reach 16.8 million according to current forecasts, which can be expected to mute average age growth. In addition, during the height of pandemic, some vehicle owners may have allowed registrations to expire because their vehicles were not being driven.

Motorcar Parts of America reported results for its fiscal 2021 fourth quarter and year ended March 31, reflecting record sales for the quarter and fiscal year with strong profitability.

Net sales for the fiscal 2021 fourth quarter increased 11.5 percent to a record $168.1 million from $150.7 million, which was a record a year ago.

Net income for the fiscal 2021 fourth quarter was $835,000, or $0.04 per diluted share, compared with a net loss of $8.2 million, or $0.43 per share, a year ago. Details of items impacting net income are shown in Exhibit 1.

Gross profit for the fiscal 2021 fourth quarter was $32.1 million compared with $36.6 million a year earlier. Gross profit as a percentage of net sales for the fiscal 2021 fourth quarter was 19.1 percent compared with 24.3 percent a year earlier. Gross margin was primarily impacted by brake caliper start-up costs and other product relocation expenses related to the company’s expansion in Mexico, both of which are now nearing completion; higher costs related to COVID-19; and other items, including non-cash and non-economic expenses totaling 6.4 percent.

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