July 26, 2021

Used-car values could pose challenges for U.S. captive lenders

The coronavirus pandemic is far from over. And as some elements of the federal stimulus program — such as additional unemployment funds and financial hardship protections — that have helped keep the U.S. economy afloat come to a close, captive automotive lenders can expect more challenges ahead.

One potential area of concern is the volatility of the used-vehicle market. Credit ratings agency Moody’s Investors Service said in May that some of the nation’s largest captive auto lenders it rates — Ford Credit, GM Financial, Nissan Motor Credit Co., Honda Finance, Toyota Financial Services and Hyundai Capital America — have adequate liquidity to withstand the coronavirus market disruption.

That’s still true, according to a June 25 report, though the agency said this week that steady value declines in the used-vehicle market could postpone recovery for these lenders.

The end of automaker incentive programs and federal stimulus packages will expose auto lenders to the impact of rising unemployment and an increased likelihood of loan losses. Constraints on new-vehicle inventory and consumers’ hesitancy to purchase vehicles amid all the uncertainty also could hurt profits.

Moody’s analyst Inna Bodeck said access to capital markets remains an option for captive auto lenders, though many have enough capital and liquidity for the time being. If consumers turn away from the car market in the second half of this year, used-vehicle values could dip dangerously.

“Once that unemployment rate crystallizes in terms of how it’s impacting consumer behavior, that’s when we can see movement in the used-car prices,” Bodeck said.

Moody’s also revised its projection on new-vehicle sales, saying the coronavirus market disruption will slash one-fourth of new-vehicle sales in 2020. That’s up 10 percent from projections of a 15 percent decline Moody’s estimated in late March.

A rise in delinquency rates and loan defaults likely will take a toll on captive profits well into 2021. While lenders are well-positioned to withstand the current environment, the worst may be far from over. There’s still room for used-vehicle values to decline further and add pressure to captive portfolios.