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Costs soar, funds are scarce — and the pain looks long-term

Wall Street volatility likely will prolong the auto industry's credit crisis through 2009, industry executives say.

And the pain is becoming intense.

Dealers surveyed by Automotive News report greater difficulty and expense financing their inventories. They say it's getting harder and more expensive to find financing for buyers — even those with good credit.

Meanwhile, the cost of borrowing continues to rise for many auto lenders.

Worsening credit conditions have led one market forecasting firm to predict sluggish U.S. light-vehicle sales of 13.7 million units next year.

And in this shaky market, the credit crunch is dividing automakers' captive finance companies and dealer networks into haves and have-nots. The haves generally are large dealerships and captive lenders that work with import brands. The have-nots are smaller dealers and captives associated with the Detroit 3.

David Cosper, vice chairman of the public dealership group Sonic Automotive Inc., said the recent federal bailouts of such financial giants as AIG, Fannie Mae and Freddie Mac are creating "scary" credit conditions. Borrowing costs are rising even for creditworthy borrowers, he said.

"I have never seen anything like this," said Cosper, a former executive of Ford Motor Credit Co. "It is terrifying."

A 2-tier system

The credit crunch is giving well-capitalized captives a growing advantage in their ability to finance inventories and make consumer loans.

Toyota Financial Services, with its AAA debt rating, has no trouble borrowing money at a low interest rate, said CEO George Borst. Toyota Financial has passed GMAC Financial Services as the largest U.S. auto lender, according to Experian Automotive.

But even Borst is not an optimist about the auto industry's prospects. Last week Borst warned that "it's too early to call the bottom" of the industry's credit problems. He predicted the industry will spend another "12 to 15 months at the bottom."

Meanwhile, GMAC faces a credit squeeze. GM's captive lender has lines of credit with several banks, said Alex Sarafian, director of consumer credit and risk management.

But "it's hard to expand beyond our current sources," he cautioned. "It's no longer even a cost issue. It's an access issue. It's affecting our ability to borrow."

GMAC and Chrysler Financial recently raised interest rates on dealer floorplans. Sonic's Cosper said he expects Ford Credit to follow. Ford Credit did not respond last week to a request for comment.

Cosper said the Detroit 3 captives have lower corporate debt ratings and must rely more heavily on the asset-backed securities markets to raise money. Because those captives' cost of money has risen rapidly, "they'll have to shrink," he said.

By contrast, Cosper said, the captives of "BMW, Honda, Daimler and Toyota have a huge competitive advantage" over their domestic rivals. But he warned that tight credit also could cause import-brand captives to raise their rates.

Chris Martin, a spokesman for American Honda Motor Co. Inc., said the company's finance captive has not "suffered the same losses we might have if we had explored the secondary market more deeply." He said the captive does not plan to change its "conservative" lending policies.

Playing defense

Several of the largest dealership groups have taken steps to insulate themselves from the credit crunch.

Charles Oglesby, CEO of Asbury Automotive Group, said his company does not depend on Detroit 3 captives for financing. Eighty-five percent of the sales volume of the 90-dealership public group comes from mid-line import brands and luxury marques.

"Toyota Financial and Honda Financial are still lending money to consumers," Oglesby said.

Pete DeLongchamps, a vice president of Group 1 Automotive Inc., said the 100-dealership public group arranged floorplan credit two years ago with more than 20 banks and captives. Those interest rates are locked in, he said.

"That's one of the benefits of being a larger company with scale," DeLongchamps said. "We're very comfortable with our situation."

David Wilson, whose Southern California dealership group is the nation's fifth-largest private auto retailer, said he floorplans with Comerica Bank. He called that lender "a very conservative bank with little or no exposure in the subprime market."

Wilson said the credit losers among dealers and lenders "are and will continue to be the companies that set aside their common sense in search of ever higher returns."

Slow recovery

CSM Worldwide, an automotive market forecasting firm in suburban Detroit, predicts U.S. industry sales will total 13.7 million light vehicles in 2009, down from a projected 13.9 million this year.

Tight credit is a big part of the anticipated decline, said Michael Robinet, CSM's vice president of global vehicle forecasts. "Credit is absolutely critical," Robinet said. "It affects automotive more acutely than other areas. The lack of leasing is a gift that will keep on giving for the next few years."

Rising unemployment, higher loan delinquency rates and the depressed housing market also contribute to tight credit. Paul Taylor, chief economist of the National Automobile Dealers Association, predicted the real estate slowdown will persist next year.

Escalating credit problems are a "game-changer" for the auto finance industry, said Sheldon Sandler, founder of Bel Air Partners, a New Jersey-based investment banking firm that works with dealerships. "It's not a ripple effect," Sandler said. "It's more like a tsunami."

Deborah Meyer, chief marketing officer at Chrysler LLC, forecast a challenging credit climate for at least the next year or so. "Consumers are nervous right now," Meyer said. "Everyone is nervous." 

Alysha Webb, Mary Connelly and Arlena Sawyers contributed to this report

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