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Inside this issue
NADA, AFSA Dispute New York Times Editorial on Subprime Auto Loans
Subprime Auto Loans: The New (Not So) Toxic Debt
Falling U.S. Used-Car Prices Will Drive Up New-Car Incentives
Sizzling Auto Sales Spur Shortages of Hot Models
Auto-Parts Giants Hunt for Mergers
G.M. to Build $174 Million Cadillac Stamping Plant in Michigan
Ferrari Coupe May Race to Record $75 Million at Auction
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Top Stories
NADA, AFSA Dispute New York Times Editorial on Subprime Auto Loans

Auto dealer and lender groups are howling in protest at an editorial in Saturday’s New York Times that equated subprime auto loans with subprime mortgages. The groups insist there is no comparison between the two types of loans. At the same time, a recently disclosed U.S. Department of Justice investigation into subprime auto loans is very much part of the debate.

On Tuesday, the National Automobile Dealers Association called the editorial, titled “When a Car Loan Means Bankruptcy,” unfair and unfounded. In a written rebuttal signed by NADA President Peter Welch, the association said that “Enforcement of existing laws against a small minority of bad players is in everyone’s interest, but smearing an entire industry for the misdeeds of a few is just plain wrong.” NADA’s Welch said the editorial portrays the auto lending industry “as a hotbed of deceptive practices and a harbinger of insolvency that could trigger another recession. Nothing could be further from the truth.” Bill Himpler, executive vice president of the American Financial Services Association, a lenders’ trade association in Washington, D.C., also told Automotive News the editorial was off base.

NADA said in its rebuttal that auto loan defaults, at a rate of less than 1 percent in June, are at historic lows. The implication: There’s no indication that a swelling number of consumers with subprime credit are finding themselves unable to make their car payments. AFSA’s Himpler pointed out other distinctions between subprime auto loans and subprime mortgages. For starters, he said, investors bought mortgages expecting the underlying assets to appreciate in value. That’s never the case with auto loans, he said. “In mortgages, people thought they were going to be flipping properties,” he said. “There’s no market for flipping used cars. Buying something that needs a new paint job and selling it for twice what you paid for it -- that doesn’t happen in cars.”

A subprime auto lender CEO ... said another big distinction is that mortgage brokers sold mortgages with no stake in how well those mortgages would perform in terms of repayment over the long term. In contrast, he said, the subprime auto lenders that sell asset-backed securities typically agree to buy back the loans if they perform below stated thresholds. “It’s called skin in the game,” the executive said. “That’s a big difference.”
Source: Automotive News
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Subprime Auto Loans: The New (Not So) Toxic Debt
By Stephen Gandel

For subprime auto loans to cause anywhere near the damage mortgage bonds did, they would have to be some pretty horrid toxic waste. It doesn’t look like that’s the case, for now.

These days, it’s the car market that could be creating piles of financial junk. Or so it seems. Nearly seven years ago, as the foreclosure wave and financial crisis entered their first stages, Fortune ran a story called “House of Junk” by Allan Sloan that took a look inside one mortgage bond. It was clear from the article that Wall Street had created loads of worthless debt that had overtaken investors, and looked to becoming something worse. Sloan called the bonds toxic waste.

But auto lending is still small compared to the mortgage market, and especially small when you compare it to what the mortgage market was at the height of the boom. In 2006, financial firms made $2.5 trillion in home loans; $450 billion of those loans were subprime and were sold off as bonds. So, for today’s subprime auto loans to cause anywhere near the damage mortgage bonds did, they would have to be some pretty horrid toxic waste.

I asked Sylvain Raynes, an expert in structured finance and owner of R&R Consulting, what he thought of the [AmeriCredit] and DTAOT deals. Raynes has a history of raising the alarm bells about Wall Street deals at the first instance of trouble. He began to raise red flags about problems in the mortgage market back in 2003. This time around, he doesn’t see problems in the auto lending market. “These bonds are safer than U.S. Treasuries,” says Raynes.

What’s more, unlike during the housing boom, there are no synthetic derivatives tied to subprime auto bonds that offer higher returns but amplify losses if the loans go bad. Will the subprime auto loans deals he has seen do the type of damage to the financial system that subprime mortgage bonds did? “No way,” says Raynes.
Source: Fortune
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Falling U.S. Used-Car Prices Will Drive Up New-Car Incentives

The U.S. auto industry will have to offer more discounts to maintain demand as prices for used cars decline. With auto sales recovering from their recession-era slump, the industry's supply of used cars has started to rise again, driving down prices. This in turn will pressure new-car prices and raise the stakes for automakers, which have enjoyed the new-car sales renaissance of the last 4-1/2 years. The National Automobile Dealers Association forecasts a nearly 7 percent decline in the average used-car price to just under $15,000 in 2016 from $16,025 in 2014.
Source: Reuters

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Sizzling Auto Sales Spur Shortages of Hot Models

This summer's auto sales have been so sizzling that dealerships are running short of the hottest new models. Last month, 27 models spent an average of fewer than 30 days on dealers' lots before being delivered to an eager buyer, about half the average that automakers consider optimal. Most wanted: Land Rover's pricey LR4 and Range Rover SUVs.
Source: USA Today
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Auto-Parts Giants Hunt for Mergers

German auto-parts maker ZF Friedrichshafen AG's attempt to buy U.S. rival TRW Automotive Holdings Corp. for more than $10 billion would be the biggest deal to hit the automotive supply chain in years, but it isn't alone: auto supplier M&A has sizzled in 2014 and industry executives are hunting for more deals. ZF has been in talks with TRW for several weeks about an acquisition and the parties are still apart on various issues, people familiar with the matter said. If sealed, the deal would marry two companies with a combined $37 billion in revenue, creating a company roughly the size of market leaders Robert Bosch GmbH or Japan's Denso Corp. It would also be better positioned to compete in an industry moving toward electrified vehicles and self-driving cars. Since news of the deal emerged, several major auto suppliers—including U.S.-based Delphi Automotive and BorgWarner Inc., and Swedish safety-parts supplier Autoliv Inc. have indicated they are eager to ink deals in the second half of 2014. While likely smaller in scale, the transactions will be driven by similar factors: easier access to financing, a desire to snap up companies with advanced technology on the shelf and fears of being left behind.
Source: The Wall Street Journal
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G.M. to Build $174 Million Cadillac Stamping Plant in Michigan

General Motors will start construction this fall on a $174 million stamping plant in Lansing, Mich., that will make components for the nearby Lansing Grand River assembly plant, the company said on Wednesday. The plant, which will stamp steel into auto components like hoods and door panels, will create or retain about 145 jobs. It will produce components for Cadillac ATS and Cadillac CTS vehicles and a future product the company has not yet announced.
Source: The New York Times
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Ferrari Coupe May Race to Record $75 Million at Auction

A Ferrari 250 GTO Berlinetta owned by the scion of a wealthy Italian family for 49 years may race off as the world's most expensive car when it's auctioned for as much as $75 million. Bonhams will offer the 1962 red two-seat coupe Thursday in Carmel, Calif. The sale is among six days of events and auctions for vintage car collectors starting today in the picturesque central coast towns of Carmel and Monterey and at the oceanside Pebble Beach golf course. The auctions last year fetched a record $312 million for a series of classic car sales, according to Hagerty Group LLC, a Traverse City, Mich.-based insurer and classic car database. In the heated market for vintage collectibles, Hagerty estimates this year's total will be $450 million.
Source: Bloomberg
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Quotable

"Enforcement of existing laws against a small minority of bad players is in everyone’s interest, but smearing an entire industry for the misdeeds of a few is just plain wrong."

   
-- NADA President Peter Welch rebutting a New York Times' editorial on auto lending, Automotive News, Aug. 13

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