Lenders hope to capitalise on a rebounding car market

THE acquisition of Chrysler Financial, the carmaker’s former lending and leasing arm, by Canada’s TD Bank, agreed to on December 21st, points to the recovery of a market that sputtered to a near-halt during the financial crisis. It now seems to offer more promise to lenders than most other types of consumer debt.

The $6.3 billion deal makes financial sense for the seller and strategic sense for the buyer. It allows Cerberus, a private-equity firm, to recoup much of the $7.4 billion it invested in Chrysler just before the car market imploded and the company was forced into bankruptcy. (Cerberus retained control of Chrysler Financial even as its investment in the parent was wiped out.) TD, one of the leading vehicle lenders in Canada, gets a firm foothold in the much bigger market next door. As long as it maintains underwriting discipline, car loans offer a high-yielding use for the glut of deposits it is gathering in its American retail bank, which has a strong presence on the east coast after a series of acquisitions.

Chrysler Financial’s market share suffered as it was wound down under Cerberus, but its links to 2,000 dealers leave it well placed to win back business. That will worry Ally (formerly GMAC), the government-controlled former finance arm of General Motors (GM), which took on the financing of many of Chrysler’s products when Chrysler Financial went into run-off.

The acquisition is the latest in a string of deals that have reshaped the industry since the crisis. Having sold GMAC in 2006 (as it happens, to Cerberus), GM concluded that it needed a captive lending arm after all: in October it bought AmeriCredit, the biggest provider of subprime car loans. TD is not the only large foreign bank keen on America’s car-loans market. Spain’s Santander Group has made several acquisitions since 2007, including RoadLoans, an internet lender, and a $3.2 billion portfolio of loans from Citigroup, which is scaling down its consumer-finance operations.

One attraction is the market’s fragmented nature, which offers newcomers the chance to establish a leading position without spending too much. In second-hand-car finance, for instance, none of the banks or specialist finance companies that populate the market has a market share in double figures. The largest is Wells Fargo with 6%, according to Automotive News.

Another enticement is the strong recovery in car sales. Some 12m-13m new vehicles are expected to roll off American dealers’ lots in 2011, up from 11.5m this year and well above the market bottom of 10.4m in 2009—though still well below the record of 17m in 2000. One hope is that more Americans will buy cars for work as the economy recovers: 86% of them use a vehicle to get to their jobs, according to the Census Bureau. TD’s executives predict that America’s $700 billion car-finance market will grow to $900 billion over the next three years.

Much of the fresh demand is expected to come from high-quality borrowers. More than 60% of the leases expiring in 2011 are held by consumers with excellent payment histories, reckons TransUnion, a credit-information agency. These “super-prime” borrowers will be deciding whether to buy their leased vehicles, often with a loan, or to lease a new car.

Yet another attraction is the relatively healthy state of car lending. Delinquency rates on prime car loans made in 2009 are returning, from a peak in 2007 and 2008, to the lower levels seen between 2002 and 2006 (see chart). Securitised car loans have experienced few credit downgrades. Where there have been defaults, strong second-hand values have shored up recoveries for lenders repossessing vehicles.

This buoyancy is reflected in the strong issuance of securities backed by car loans compared with those linked to other categories of consumer debt, such as credit cards and student loans. Around two-thirds, or $60 billion, of this year’s total asset-backed issuance was for car loans. That is expected to rise above $70 billion in 2011. Strong investor demand has driven down interest rates. The spread over Treasuries on AAA-rated bundles of car loans is about 0.6 percentage points, slightly less than the gap for cards and a third of that for student debt. While the market for subprime mortgage debt is moribund, investors have renewed appetite for lower-quality car debt: a recent issue by Santander was increased from $675m to $950m because of demand.

All this would seem to vindicate TD’s bullishness, even if its goal of a 20% return on invested capital within four years looks optimistic. Its big move into the market certainly appears better timed than that of the supposedly super-smart Cerberus when it bought Chrysler.