The fear of an imminent collapse in car prices takes hold of the undue …


Used vehicle auctions are virtually at a standstill for now, much like the rest of the economy. The big concern of market watchers is that vehicles are already starting to pile up in the places where buyers and sellers make and accept bids on cars and trucks – and this imbalance will last for months.

If this fear materializes and prices fall, it will hurt automakers and their internal lending units, who will likely have to write down the value of leases that assumed vehicles would hold more value. Car rental companies will also receive less money from sell their fleet vehicles, which sit idle amid a global pandemic that has been catastrophic for travel.

“Six months from now there will be huge, if not unprecedented, wholesale supply levels in the market,” wrote Dale Pollak, executive vice president of Cox Automotive, which owns the largest auto auction company in North America, in a press release. open letter at car dealerships last week. “Cars are coming, but they don’t sell. Today’s huge wholesale inventory supply suggests supplies will be even larger in the months to come.

Lease extensions

The automakers are doing what they can to limit the damage. The financial units of General Motors Co. and Ford Motor Co. are already offering one-month lease extensions to their customers. In addition to easing the pressure on consumers who fear going to showrooms, it will delay some of the influx of non-rental vehicles headed to auctions that currently only work virtually.

But these measures are unlikely to go far enough to address the asymmetry between the supply of used vehicles and the demand that is not expected to rebound anytime soon as nearly 17 million Americans have been asking for unemployment benefits in the past three weeks alone.

“There aren’t a lot of people wearing gloves and masks running around to buy cars,” said Maryann Keller, a former Wall Street analyst who is now an auto industry consultant in Stamford, Connecticut. “The auctions are mostly closed and they’re filled with cars that don’t have buyers.”

US auto sales rate slows to 2010 levels

Residual risk

Used car sales fell 64% in the last week of March, according to Manheim. The auction company owned by Cox Automotive estimates that prices have fallen by around 10% in recent weeks, although that figure is based on unusually low volume at auctions.

If this level of decline continues or worsens, it could have huge implications for GM, whose financial unit of General Motors had $ 30.4 billion in vehicles leased to customers at the end of last year. . If GM Financial needs to increase its estimate of the depreciation of the value of these vehicles, each percentage point increase increases the company’s expenses by $ 304 million, according to a regulatory filing.

GM has assumed a 4% drop in residuals this year. If the 10% drop Manheim experienced recently persists, depreciation expense could offset the $ 1.9 billion GM Financial earned in pre-tax profit last year, said Joel Levington, credit analyst at Bloomberg Intelligence. Ford Motor Credit faces a similar risk, he said.

Ford said Monday it was considering further actions to raise funds after reporting a preliminary loss of $ 600 million in the first quarter. One option could be for Ford Credit to take advantage of the thaw in the asset-backed securities market, Levington said in a report.

Read more: Ford’s financial arm is generating more profit than ever

Car rental companies that appealed to the Treasury Department and the Federal Reserve as a group last month for loans, tax breaks and other support await a similar fate. Hertz Global Holdings Inc., Avis Budget Group Inc. and Enterprise Holdings Inc. are all trying to find ways to unload certain cars without taking too much of a shock, said Keller, former board member of Dollar Thrifty Automotive Group Inc. ..

If Avis and Hertz have to sell cars at lower prices, it will increase the costs of maintaining their fleets. A sharp drop in residual values ​​comes directly from bottom lines and can create liquidity problems, said Hamzah Mazari, analyst at Jefferies.

For Hertz and Avis, each 1% increase in fleet costs reduces earnings before interest, taxes, depreciation and amortization by about $ 20 million, Mazari said.

Motivated sellers

Hertz hasn’t cleaned as many cars as Avis, which means it owns more vehicles with few customers to rent them to.

But the rental companies that sold aggressively in late March as Covid-19 spread did so at a price, said Jonathan Smoke, chief economist at Cox Automotive.

“Rental companies are motivated salespeople,” Smoke said. “They moved the cars quickly but saw the impact on the price.”

Dealers are also looking to tap the used car inventory that is on their lots into the money they can raise. One of Manheim’s most important jobs right now, Cox Automotive’s Pollak wrote in his letter last week, is finding places to park the stream of vehicles destined for auction.

“It is essential that dealers recognize what can be an unpleasant truth,” Pollak said. “You may need all the money you can muster to support your business today and put it in a position to be viable when the market returns. “

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