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Floor plan financing more available under government loan program

November 15, 2010

Three floor plan finance sources for franchised dealers — Ford Motor Credit Company, BMW Financial Services, and World Omni Financial Corporation — will receive a combined $2.3 billion in Term Asset-backed securities Loan Facility (TALF) funds to support their floor plan lending operations, it was announced this month.

The following briefly summarizes this development:

• The reduced amount of floor plan financing for dealers in the last year stems in part from the inability of floor plan finance sources to secure an ongoing supply of affordable funds;

• Under normal market conditions, many floor plan finance sources (particularly non-depository institutions) rely on the securitization market to provide funds for their floor planning operations;

• The securitization process involves finance sources bundling their floor plan lines of credit and selling them as a securitized bond to private investors. The payments finance sources receive from the private investors provide them with the cash needed to continue their floor plan operations.

• With the onset of the credit crisis last year, the securitization market ground to a halt and cut off this critically important source of funds. In response, the Federal Reserve Board announced in November 2008 the creation of the TALF, which seeks to get investors to begin purchasing securitized bonds (also known as asset-backed securities or ABS) again by providing them with low cost, non-recourse loans.

• Following meetings with the NADA and other industry organizations, the FRB agreed to include auto retail, lease, and floorplan ABS in the new lending facility.

• Although the TALF has been enormously successful in reopening the securitization market for retail credit (the TALF has funded more than $38 billion in auto retail ABS since March 2009), it did not reopen the market for auto floor plan securitizations. This is due to the TALF’s requirement that securitized bonds be AAA-rated and the credit agencies’ unwillingness to provide this rating to floorplan securitizations in the midst of the industry restructuring.

• To address this situation, the NADA coordinated with numerous industry representatives and met on repeated occasions with the FRB, the Federal Reserve Bank of New York (which administers the TALF), the Treasury Department, and the credit rating agencies.

During these meetings, NADA representatives explained in detail a variety of factors that demonstrate the strength of auto floor plan collateral in today’s marketplace (which is a significant factor in determining the appropriate rating for floorplan ABS). These efforts helped the rating agencies provide the required AAA ratings for the transactions mentioned above.

While this neither creates a new finance source to which dealers can submit floorplan applications nor independently restores floorplan lending to the level that was present before the credit crisis set in, it is a major step forward in obtaining more favorable lending conditions for franchised dealers.

The NADA will continue to work towards expanding credit capacity for dealers.