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Auto dealer bankruptcy an anomaly for strong-performing Ally floorplan book

A Chapter 11 bankruptcy filing by at least the second Ally Financial Inc. auto dealer customer in less than three months appears to stem from unique circumstances. But data recently reported by the lender suggests some weakening in borrower credit quality in what has been a pristine book of business.

The Fort Worth, Texas-based entity that conducts business as Mac Churchill Acura filed for bankruptcy protection May 21, reporting that it owed Ally more than $18 million under a secured dealer inventory, or floorplan, financing agreement. In early March, the corporate parents of the dealerships operating as Manhattan Jeep Chrysler Dodge Ram and Manhattan Alfa Romeo Fiat filed Chapter 11 petitions, reporting combined debt to Ally of nearly $22.4 million in connection with floorplan financing.

Dealers use floorplan loans to finance the acquisition of new vehicles at their wholesale invoice price for resale to consumers and to purchase used vehicles at certain specified percentages of their wholesale book values or auction prices. The loans are generally secured by a first priority interest in all the vehicles owned by the borrowing dealer and in some cases, such as those affecting the Fort Worth and Manhattan dealerships, additional collateral in the form of liens on items such as parts and supplies, furniture and intangibles.

Mac Churchill Acura said it worked with Ally to facilitate a proposed bankruptcy court-supervised sale of the dealership after it became clear that it was facing the prospect of being out of compliance with terms of the floorplan agreement. The Manhattan dealers, meanwhile, alleged that Ally, just prior to the bankruptcy filing, took $1 million of collateral into its possession, obtained control of the titles of vehicles on the property, requested that automaker Fiat Chrysler Automobiles NV forward incentive monies, and suspended the floorplan financing agreement.

The Acura dealer's CEO attributed the Chapter 11 filing in a court filing to unspecified financial problems that are the subject of ongoing litigation. A recent article in Crain's New York Business linked the circumstances culminating in the Manhattan dealers' petitions to broader pressures unique to the New York metropolitan area, where the increasing prevalence of auto brokers in that market have placed downward pressure on industry margins.

S&P Global Ratings reported earlier in 2018 that Ally Bank had no net losses on its floorplan portfolio since 2008. Although the company's allowance for loan losses in its U.S. commercial auto loan book, which includes floorplan loans and certain other dealer-related financings, has been increasing incrementally from low levels in recent quarters, its coverage ratio represented only a fraction of the amount associated with retail auto loans.

"We've demonstrated very low losses over a long period of time, and it's much less volatile than a typical [bank commercial-and-industrial] loan," CFO Jennifer LeClair said during Ally's financial outlook conference call in March.

A prospectus supplement filed in connection with Ally's second year-to-date securitization of floorplan loans, Ally Master Owner Trust Series 2018-2, contains data that suggest some slippage in the underlying credit quality of the customer base.

Ally assigns its dealer customers to one of four categories based on its proprietary evaluation of their creditworthiness: satisfactory, limited, programmed and no-credit. The first of those categories includes dealers with consistently profitable operations. Dealers assigned to the "limited" category are viewed to present a moderate credit risk, while those in "programmed" status are deemed to pose a more significant threat.

Approximately 78.3% of the receivables as of March 31 were scored as "satisfactory," down from 83.2% on the same date a year earlier and 86.6% two years prior. Loans assigned to the "limited" category increased to 20.9% of the book as of March 31 from 16.4% on the same date in 2017. The 0.8% of loans assigned to the lowest two categories represented an increase from 0.4% on the same date in 2017.

But the ultimate performance of the portfolio is not entirely dependent on the financial health of the individual dealer borrowers. Ally said in the securitization filing that auto manufacturers in most cases will repurchase some of the new vehicles backing a floorplan loan at their invoice price pursuant to state franchise law requirements, contractual obligations and/or their self-determined business interests in the event of a foreclosure. Manufacturers also have historically provided financial assistance from time to time to their franchised dealers.

Loans to General Motors Co. dealers accounted for 48% of Ally's portfolio of dealer floorplan accounts as of March 31, with Chrysler dealers representing 32.2% of the book. Loans associated with new vehicles accounted for 86.9% of the portfolio. The Ally Master Owner Trust consists of a revolving pool of loans selected from the bank's overall portfolio of floorplan accounts.