Dealer floorplan: SPV may not overcome all hurdles

Federal Treasurer, Wayne Swan, announced last week a $2 billion plan to save dealers left without finance for their 'floorplan' subsequent to GMAC and GE Money withdrawing services from the market. While the plan has been broadly welcomed by the industry, it leaves a couple of issues hanging.

The new plan, under the operating title of 'Special Purpose Vehicle' (reported here), maintains financial continuity as the dealers obtain longer-term finance to cover the costs of the new vehicles acquired from car companies.

Executive Director for the Victorian Automobile Chamber of Commerce, David Purchase approves of the stop-gap measure, which is a Federal Government initiative involving the coordination of funding from the four major Australian banks (ANZ, Commonwealth, NAB and Westpac) and technical assistance provided by Credit Suisse.

Purchase described the SPV as "a creative solution to the problem" and commended both the Federal Government and banks involved accordingly.

The providence of the SPV is well-timed, with the plan taking effect 'by' January 1, 2009, a day after the 60 days' notice provided dealers by GE Money and GMAC is due to expire. It allows the two finance companies to recoup their outlay without having to go in boots-and-all to recover their investment from dealers.

"The 60 day notice period provided by GMAC and GE Money was too short, and VACC was among the many voices calling for a deadline extension," says Purchase.

When asked by the Carsales Network whether the implementation date for the SPV (January 1) would be too late for those dealers issued with a 60-day notice from GE and GMAC -- given that notice expires the day before -- Purchase was confident that the delay wouldn't pose a problem.

"There'd be a little bit of flexibility with that," he said.

But what of Ford Credit, another financier weighing up its options for continuing finance of dealer floor stock? Will the SPV cover dealers left holding the baby if that company decides to withdraw from the dealer financing market? For the time being, those dealers buying their new-car stock through Ford Credit seem to be safe (more here).

We contacted the Treasurer's office for clarification. Would the SPV protect dealers financing through a third lender if that lender chose to jump ship? A spokesperson for the Treasurer told us that the SPV was specifically intended to assist dealers currently financing their floor stock through either GE Money or GMAC, but the spokesperson wouldn't be drawn on whether the fund could also serve the purposes of dealers financing through a third company.

Asked in turn whether financiers could assume liability for another lender moving out of floorplan financing, David Purchase was uncertain. In fact, he advised that there were still some issues to be ironed out.

"The fund's not available to dealers, it's available to financiers," David Purchase explained to the Carsales Network. He outlined a hypothetical situation in which the SPV might be of benefit to dealers other than those financing through GE and GMAC.

"Say Ford Credit went out of existence -- and left a hundred dealers behind. Then, the other financiers... they're all saying at the moment 'we haven't got enough money to cover those dealers', but now that these funds are available, we can have access to them -- we can cover them."

But of course, picking up the pieces of a third finance company departing the floorplan sector is not something agreed by the Federal Government, as yet.

Purchase explained that the way the SPV works is like this: It is effectively a bucket of money provided by the four major banks and into which financiers can dip to pay out GE Money and GMAC, based on pre-existing finance arrangements between those two financiers and the respective dealers. The new financier then assumes the liability, receiving payments from the dealers and, in turn, reimbursing the SPV fund. In effect, the SPV merely extends the term of the loan from the 60-day period laid down by GMAC and GE Money.

"It's a proper commercial transaction," he said, "the only reason we need that bucket there now with money in it is because the financiers can't find any money to borrow".

"Either they can't find [the money] or the cost of borrowing is too high.

"Now there's one little hiccup that I've detected this morning," he continued.

"That money will only be available to financiers who are already floorplan financiers. What if you're not a floorplan financier at the moment -- but you want to move into floorplan financing? It would appear that you would not be able to, and use that money.

"We think that's unfortunate... we think it would be better if we were attracting new entrants as well, to create more competition.

"'Any financiers currently operating in the industry will be eligible to access the SPV'," he quoted from the Treasurer's press release. "Now, by the industry, is that the finance industry or the floorplan industry?"

The VACC is keen to see the SPV encourage more lenders to enter the market. If the SPV stipulates that lenders must already be in the business of extending wholesale finance to dealers for their floor stock, then far from replacing two lenders with more than two, as the representative body had hoped (more here), it won't replace the two financiers at all.

Purchase advised that the VACC and other interested parties were planning to discuss this issue with David Murray, former head of the Commonwealth Bank and now head of the Future Fund.

When asked how quickly the SPV could release funds to financiers and whether that would be fast enough to satisfy dealers, Purchase responded by saying: "Pretty quickly".

"They're already talking to dealers, they're doing a lot of the background work now, they're doing a lot of the due diligence now -- and they'll be ready very quickly."

Purchase finished on a mostly upbeat note.

"Most of the dealers who should get refinanced will get refinanced now. Those who don't will probably go out of business, but that's probably got more to do with their own circumstances than with the credit crisis."

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