NEW YORK — Fitch Ratings has lifted the moratorium on rating auto dealer floorplan transactions and published a revised Global Dealer Floorplan (DFP) ABS criteria report. It supersedes, in its entirety, the reports titled “Rating Criteria for U.S. Dealer Floorplan ABS”, dated May 14, 2008, and “European Auto Dealer Floorplan ABS Criteria”, dated Feb. 6, 2008.
The orderliness of the bankruptcy process has been a key assumption in Fitch's prior criteria particularly for non-diversified DFP such as those issued by auto-related captive finance companies. As a significant departure from former criteria, Fitch now assumes the likelihood of catastrophic dealer failures and highly disorganized collateral liquidations upon a rapid and disorderly bankruptcy of the manufacturer/lender.
Fitch's new approach for non-diversified platforms assumes the following:
High dealer default rates (up to 100 percent of dealer network) adjusted based on an assessment of dealer network strength and its ability to survive independently of manufacturer support (e.g. based on concentration of multi-franchised dealers); absent relevant dealer network data, Fitch will not make adjustments (or accord any credit) to dealer default frequency estimates.
High severity of collateral losses due to disorderly unwinding and liquidation of failed dealers.
By assuming a high dealer default frequency regardless of the Issuer Default Rating (IDR) of the manufacturer/lender, Fitch effectively de-links the DFP asset-backed security (ABS) rating from the financial strength/IDR of the manufacturer/lender.
Additionally, Fitch's revised criteria places a notable emphasis on analyzing operational risks inherent in DFP platforms by focusing on the logistical feasibility of repossessing, transporting and disposing repossessed inventory under a liquidation scenario, and capacity/depth of the secondary market to absorb large potential increases in auction volumes. Fitch will cap ratings for DFP ABS platforms that lack infrastructure to support such operational risks.
The criteria report is intended to encompass both diversified and non-diversified (including auto captives) DFP platforms. Although the key analytical considerations of Fitch's rating methodology for diversified DFP ABS remain largely unchanged from former criteria, under the revised criteria, Fitch's expectations for credit enhancement (CE) levels for both diversified and non-diversified platforms will be higher than they have been in the past at all rating categories.
The revised criteria may impact ratings of currently outstanding auto DFP ABS transactions. Fitch expects to conclude its review of the existing portfolio by the first quarter of 2010. The rating actions and their magnitude will depend on the degree to which available CE deviates from expected coverage levels under the revised methodology based on the assessment of dealer network strength and cash flow modeling results. The dealer strength assessment and consequently, dealer default frequency will largely depend on the additional dealer level information furnished by the issuers.
Fitch will also consider current performance metrics and qualitative factors such as remaining time to maturity to determine if any rating actions are warranted. Fitch expects the potential rating actions to be within one rating category.
The Fitch report, “Global Rating Criteria for Dealer Floorplan ABS” is available on the Fitch Ratings web site at www.fitchratings.com under the sectors: Structured Finance >> Asset-Backed Securities.
