High-Finance Meets High-End: Investors Jump at the Chance to Buy High-End Car Loans

Hey Monkeys,
Just came across a WSJ article that talked about numerous high-end car manufacturers including Lamborghini, Porsche, and Bentley securitizing their car loans. Here are some highlights from the article:

"Auto-loan securitization markets are red hot," and car companies are taking advantage of that, said Jose Pluto, an analyst at Thornburg Investment Management. "Lenders can finance everything."

The bond sale taps investor demand for debt that is considered safe, as car-loan borrowers rarely default and the loans involved are backed by models with high resale values. The bonds also offer investors slightly higher yields than ultrasafe government bonds or other debt with top ratings. Bond buyers concerned about possible sharp moves in interest rates also have sought out car-loan-backed debt, as it typically matures in three years or less.

In addition to higher yields, investors favor this type of debt because it hasn't seen mass defaults like mortgage-backed bonds did during the financial crisis. Four of the 3,000 slices of auto-loan-backed debt rated by Standard & Poor's in the past 28 years have defaulted, and none since 2011.

Sounds like a great idea to me. The bonds are AAA rated and have higher yields than government bonds. Let's go invest in some super cars!

Thoughts Monkeys?

 

Interesting article, I think it's a neat idea, but there could be potential for high-end auto companies to start offering financing more liberally to non-investment grade clients and the market value of luxury cars could fluctuate just as well so I don't think the arrangement is bulletproof. I am curious what some of the more knowledgeable users think about this.

 

Friend of mine runs a supercar dealership and I asked about depreciation and resale if I were to buy one used. The depreciation halts at a certain point (depending on milage and maintenance), so the loans are very secure from an asset valuation standpoint. Borrower defaults and the car can be resold for the same price over and over.

The financing is much trickier than traditional loan and the downpayment requirement helps bridge the gap between initial depreciation and asset value.

Say you have a 2005 Bentley GT with 4,000 miles. It will sell for around $80k and will continue to sell for $80k until it has more than 15,000 miles. So you can buy the car, drive it for a few months and sell it for the same price. Lenders should love that if you meet their criteria.

Insurance companies are the ones that will actually prevent the loans going to non-investment grade clients. Insuring those cars is quite expensive and not every insurance company will write the policy, especially if you have a poor driving record.

That's been the result of my research into owning a super car.

"Everybody needs money. That's why they call it money." - Mickey Bergman - Heist (2001)
 
AcctNerd:

Friend of mine runs a supercar dealership and I asked about depreciation and resale if I were to buy one used. The depreciation halts at a certain point (depending on milage and maintenance), so the loans are very secure from an asset valuation standpoint. Borrower defaults and the car can be resold for the same price over and over.

The financing is much trickier than traditional loan and the downpayment requirement helps bridge the gap between initial depreciation and asset value.

Say you have a 2005 Bentley GT with 4,000 miles. It will sell for around $80k and will continue to sell for $80k until it has more than 15,000 miles. So you can buy the car, drive it for a few months and sell it for the same price. Lenders should love that if you meet their criteria.

Insurance companies are the ones that will actually prevent the loans going to non-investment grade clients. Insuring those cars is quite expensive and not every insurance company will write the policy, especially if you have a poor driving record.

That's been the result of my research into owning a super car.

Sounds like your friend was being a bit optimistic there. The majority of non-commodity type assets out there will depreciate, obviously some quicker than others. Just because it's of higher quality doesn't mean it won't lose value over time. If the resale market is cold and people only want the newest of new, you're gonna have a hard time finding a buyer. If someone with a fat wallet can buy a new super car for a slightly higher price than a used, possibly slightly damaged (you just don't know) vehicle, why wouldn't they?

All I'm saying is that asset values are dynamic and when you start saying the collateral value won't change or has a floor, you're just asking for trouble. Those loans/bonds/ or whatever is gonna turn to a quick bucket of sht once those overly optimistic assumptions start to turn over.

 

I didn't read the article, but based on your quotes... just because debt is rated by S&P, doesn't mean its rated AAA.

Yes, ABS markets are very hot, but not entirely sure what this has to do with high-end cars...? I would actually think that ABS serving middle America is a better investment on a risk adjusted basis (APR less loss rate).

As you mentioned auto loans are generally money good... the used car market is generally pretty robust (unlike the foreclosed house market) so I would think there aren't as many frictional costs.. exotics are actually less liquid.

 
Best Response

I work in subprime Auto Finance, and let me tell you that there is lots of fraud in this business from the dealership side and as well with the customers.

I will say that auto financing is very lucrative though, due to dealer fees and interest rates if you've got the right head on you and focus on quality.

My company Loans at at LTV or loan to value of above 120%+ and even further, Not loan to price, so the dealer can sell a car for more then the value ( duh, else they wouldn't sell it) and then we charge the customer interest.

Lets take a car that is worth 8000 but the customer buys for 10000 so he takes out a loan for 10,000.

Right now that would be a LTV or loan to value of 8000.

What most people are not aware of is that out of that 10000 you paid for the car, you may have paid a 125% LTV ( which is fine the dealer needs to make money)

The thing is, we only pay the dealer a percentage of that 10,000. Normally say we have a 12% fee, so we end up cutting the dealership a net check for 8,800 even though you're financing 10,000.

So we make 1,200 off the top.

Take a 20% simple interest loan on 10,000 over 60 payments at a payment of 264.94

264.94 * 60 = 15,896.4 or 5896.40 in interest providing this customer is never late, so no late fees or anything else of that sort.

So we end up putting 8,800 out to receive a total of 15,896.4

or a profit of 7,096.40.

Please do note that none of this calculates the time value of money.

So auto financing can be very lucrative, I would like to see more ways to invest in cars loans, but I do fear that if too much money goes into investing in car load derivatives we will see another subprime bubble. The more money that gets pumped into the system the easier is it to become an originate and sell model, and from the mortgage crisis, we all know how upstanding and straight / narrow originate and sell model type business are (Mine isn't we keep the loans on our books) .

Also as far as being AAA rated, a borrower in one stats probably has more to do with a borrower in another state.

Also, due the resale issue, the idea is to keep the car on the books as long as possible because when you repo a car unless you have your own lots to liquidate it you end up selling it at auction for a loss, or a small gain if any, especially if the LTV is huge like I'm sure it is on many high end cars.

 

Good post but I don't think auto leasing is anywhere near as lucrative as you say it is.

Firstly I just searched google for a car loan quote and I got an APR of 2.24% from BOA so your 20% rate is only going to be for the absolute shittest customers. Granted that rate I was quoted was "as low as", but regardless the average for your book is probably going to be somewhere in the middle.

I also think it's very unlikely you're skimming 12% of the "value" of the car from the dealer up front i.e. 60% of the gross margin on the sale. There's just no way a dealer would agree to that, otherwise they might as well just sell the car to a cash buyer and make an extra 1200.

Also you are confusing the notion of "revenue" versus that of "profit". You haven't taken into account the fundamental cost of lending money which is your cost of funds. Then you must factor in a deliquency rate is probably around 7-10% of your book, which represents working capital you must finance. Finally you will have a high loss rate due to the creditshitness of your clients and since your book is probably only 70-80% collateralized that's going to be a substantial hit. Then you have to pay wages to the thousands of support staff you have to employ for collections, or else you factor your receivables which is another 2-3% loss on your book.

I would guestimate you're not really making that much money at all.

 
diverse_kanga:

Good post but I don't think auto leasing is anywhere near as lucrative as you say it is.

Firstly I just searched google for a car loan quote and I got an APR of 2.24% from BOA so your 20% rate is only going to be for the absolute shittest customers. Granted that rate I was quoted was "as low as", but regardless the average for your book is probably going to be somewhere in the middle.

I also think it's very unlikely you're skimming 12% of the "value" of the car from the dealer up front i.e. 60% of the gross margin on the sale. There's just no way a dealer would agree to that, otherwise they might as well just sell the car to a cash buyer and make an extra 1200.

Also you are confusing the notion of "revenue" versus that of "profit". You haven't taken into account the fundamental cost of lending money which is your cost of funds. Then you must factor in a deliquency rate is probably around 7-10% of your book, which represents working capital you must finance. Finally you will have a high loss rate due to the creditshitness of your clients and since your book is probably only 70-80% collateralized that's going to be a substantial hit. Then you have to pay wages to the thousands of support staff you have to employ for collections, or else you factor your receivables which is another 2-3% loss on your book.

I would guestimate you're not really making that much money at all.

Also, we do not provide leases, we just do straight financing. Maybe your mention of leasing is a slip or the tongue or is there a possibly that you are misguided.I'll assume it was a slip of the tongue in this case, but I will explain for others that may not know. A lease is when you pay a premium or rent for a car that basically pays for the deprecation of the car that contains mileage limits and restrictions and you get no equity in the car. Financing a car is sort of like a mortgage, you take a loan out for the purchase price and that generally included + taxes fees / warranty / gap and you make monthly payments to build equity or ownership in the car so when you trade it in you have some value or ownership in it. When a lease finishes you have a right to purchase the car outright at a certain price, but you have zero equity in the car.

If you look back though my post you'll see that I said subprime auto lending, we currently do no prime loans, if you really want to talk low rates Ford Credit does 0% APR for prime / super prime borrowers. We buy deep subprime, recent bankruptcys, etc I'm talking under a 575 FICO score, our lowest interest rate is 19.95 and we go as high as 24.95. We are able to do this due to historical customer performance evaluation and analysis, what factors contribute to non preforming loans etc.

Regarding the dealer fee, the fees range in my industry from 3% all the way to 25% with a several payment recourse ( Meaning that the dealer agrees to purchase the deal back from us if the customer defaults within a certain number of payments. You have to remember that even with this fee the net check to the dealer can still be above the value of the car due to us lending up to 145% LTV So were skimming off of the price, not the value.. Also we do provide rebates or fee reductions for GAP / warranty products as well a a fee reduction for installing a GPS tracking device on the car.

When dealing with most subprime consumers they truly don't have the cash purchase a vehicle outright, and if they don't turn over cars fast enough dealerships take a huge hit because they finance most of the cars on the lot via Floorplan companies (Like a line of credit for auto dealerships)

Also, our book is 100% collateralized due to a requirement of a first priority lien having to being perfected at the time of funding. If a first priority lien is not secured at the time of funding we enforce that the dealership repurchase the contract from us and we have a right to the net check plus processing fee and interest due to acceleration clauses in the contract.

Also, factoring receivables is not really a strategy we employ because we have revolving credit lines for funding deals and other lines of credit, and that does not even mention the securitization or turning these accounts into ABS.

When mentioning thousands of support staff, a company that is similar to mine has a book of 1.5b and only employs 700, ~300 are responsible for servicing debt, so with a smaller company like mine I would say its quite short of thousands, besides a collector makes ~8-12 an hour and with advanced technologies like automated computer dialing and computers that leave human recorded voice mails the average collector can manage more accounts then you can think.

You are correct that when I mentioned profit I should have stated revenue, but I also remind you that we also offer service protection plans ( Warrantys / insurance) along with GAP insurance so there are two other sorts of revenue.

 

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