NEW YORK--(BUSINESS WIRE)--Dealer floorplan (DFP) ABS assets and ratings will be stable in 2014 due in part to a robust vehicle sales forecast. Fitch's U.S. light vehicle sales forecast for 2014 is 16 million units. That would provide ample support for U.S. dealer revenues and profit levels. Dealers also expect to benefit from healthy demand for both new and used vehicles as the U.S. economy slowly recovers, increasing demand for new vehicle models, and late-model pre-owned vehicles. An aging U.S. vehicle fleet on the road, stable parts/service revenues, and low interest rates also bode well for dealers' bottom lines in 2014.
We expect monthly payment rates (MPR) to be stable in 2014. We forecast trust agings to be stable and believe dealer bankruptcies and trust losses should be minimal in 2014.
Our expectations assume that manufacturers continue to manage the vehicle supply and demand equation prudently so dealers can keep costs, including interest costs on DFP financing, down. Interest on DFP loans is one of the biggest costs for a dealer. Excess inventory raises costs and reduces profit margins.
In recent months, managing inventory levels has become more important. Levels spiked to an 88 days' supply up from 64 days in December as sales were slow, partly due to recent severe winter weather. Dealers aim for a 60-days turn rate. Therefore, manufacturers must look to manage excess inventories through slowing production or juicing incentives over the next few months in order to reduce stocks. To date, this has had little impact on trust MPRs.
The potential for higher interest rates in 2014 may also result in higher costs for dealers. Despite this, dealers' balance sheets are strong and are expected to comfortably absorb such higher costs if this were to occur in 2014.
Dealer consolidations may heat up in 2014 as bigger dealer groups chase growth in market share, revenues, and profits. Larger dealer groups such as AutoNation, Inc. and Penske Automotive Group comprise the biggest dealers in DFP ABS trusts. Increased dealer acquisitions may result in higher concentrations in DFP trusts. DFP ABS master trusts have concentration limits in place to ensure diversity among dealers comprising a trust, limit exposure to potential dealer fraud and/or bankruptcies, and ultimately losses to the trust.
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