IFR International - 21.07.2018

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Auto loans weaken in secondary

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„ US Average bids for auto loans drop to 98.64% of face value

Secondary loan prices for US automotive

manufacturers and components makers are

falling as investors view proposed US tariffs of

up to 25% on imported automobiles and parts

as negative for the sector.

The Trump administration heard pleas from

leaders representing the domestic auto industry

in US Commerce Department hearings in

Washington on Thursday; the industry said that

duties would hurt competitiveness, drive up

prices on cars and trucks and trigger major job

losses. The public hearings examined whether

the import of vehicles represents national

security risks.

Average bids for auto loans were 98.64% of

face value on July 18, 151bp lower than the 100.15

on February 1 that was the highest point in the

year. The start of the trade tariff talks dragged

levels down to 99.8 in early March, according to

Thomson Reuters LPC data.

“The softness is likely due to a multitude of

factors including slowing auto sales growth,

pricing pressure, and weakening profit margins,

which get compounded by the ongoing

uncertainty around trade wars,” said Nishit

Madlani, director and ratings analyst for autos at

Standard & Poor’s.

Auto loans are weakening, along with the

overall US secondary loan market, which posted

a lacklustre second-quarter return of just 0.7%,

the worst quarterly performance since the fourth

quarter of 2015, according to industry body the

Loan Syndications and Trading Association.

Auto components supplier COOPER STANDARD

AUTOMOTIVE’s US$337m term loan fell to 99.75-

100.375 on Wednesday from 100.75-101 in May.

Automotive supplies producer AMERICAN AXLE &

MANUFACTURING also failed to attract investors

to refinance a US$1.5bn loan and ultimately

shelved the transaction in late May.

SOUND THE ALARM

Major credit ratings agencies have also sounded

the alarm about the auto sector. Moody’s said

the tariff would be negative for almost every

auto group including carmakers, parts suppliers,

dealers and transport companies. Sales and

margins for nearly all automakers will likely be

squeezed, according to S&P, and Fitch Ratings

estimated the aggregate impact of tariffs could

approximate US$47bn annually.

In May, President Trump ordered the “Section

232” national security probe into imports of

autos and said in late June that the investigation

would wrap up in three to four weeks, Reuters

reported. Similar national security probes have

led to import tariffs on steel and aluminium.

“Ongoing discussions add significant

uncertainty because so many negative outcomes

are possible,” Madlani said. “Tariffs will be

harder to elude because of the complex, globally

integrated automotive supply chains. Should the

trade wars escalate, indirect effects could lead to

a GDP growth dip easily below our 1.8% estimate

for longer-trend growth.”

The magnitude of the tariff impact will come down

to the countries it applies to, particularly whether

Mexico and Canada would be targeted, according to

Tim Harrod, lead auto parts analyst at Moody’s.

“It could be a very significant impact,” he said.

“The impact will largely come from if the tariff is

applied to auto parts from Mexico and Canada.

Many of the parts suppliers have locations in

Mexico and Canada.”

Numerous automakers have built assembly

plants in Mexico to service the US market,

according to Moody’s. In 2017, Mexico produced

3.8 million vehicles, 82% of which were

exported, and 84% of those imported went to

the North American market.

Yun Li