Chapter 2
The Special Purpose Vehicle
Background
2.1
In late 2008, GE Money Motor Solutions and GMAC announced that they
would be exiting the Australian market for wholesale floorplan finance for car
dealers. This was expected to have a major impact on the availability of
wholesale floorplan finance for Australian car dealers. It was estimated that
these two companies provided floorplan finance for approximately one quarter of
new car dealerships.[1]
2.2
Mr Greg Cohen, Managing Director of FCA Holdings Pty Ltd (also known as
Ford Credit), defined wholesale or floor plan financing as 'providing funding
for new and used vehicles held at dealerships'.[2]
He went on to describe the importance of wholesale financing for dealers:
Wholesale financing is a critical part of the smooth flow of
vehicles from the manufacturers to the dealers and makes it possible for
dealers to stock a large range of vehicles. A typical medium-size dealer has
about 45 days supply of vehicles, or $3 million in new vehicle inventory, on
hand at any given time. Used vehicle inventory is typically at 75 days supply,
and an average borrowing for this size dealer would be about $1 million. The
provision of dealer financing is considered critical to the survival of many of
our dealers and it is directly linked to the sustaining and growing vehicle
sales of Ford Motor Company.[3]
2.3
Mr Michael Delaney, Executive Director of the Motor Trades Association
of Australia (MTAA), described wholesale or floorplan financing as a
'specialist activity':
The problem we had is that it is a very specialised market.
It is not a market that the banks typically stand in or finance companies stand
in. The reason is that the goods and the assets against which the floor plan
finance is secured are, of course, mobile, being motor vehicles. So it is a
come-and-go arrangement against stock, the composition of which stock is constantly
changing as it translates from wholesale into retail stock.
Being as specialised as it is, there were typically very few
financiers in that market. I think in total there were about eight, and they
were specialised. They have been specialised and operating in it for a long
period of time, as you have just heard from Ford.
The process of getting set with an alternative financier and
the due diligence that is required by those specialised financiers is something
that can take up to three months. It involves an extraordinary level of assessment,
analysis and insight into the affairs of the particular dealer, and ultimately
a judgement of the strength of the balance sheet.[4]
2.4
Mr Delaney described the possible implications for the wider motor
trades industry arising from the inability to obtain finance as follows:
...if the dealerships, for whatever reason, find that their
floor plan finance dries up, they cannot order cars from the factory. If they
cannot order from the factory, the supply chain from manufacturing through to
the dealership gets interrupted nearly immediately. It is all just-in-time
manufacture, real-time. What we said was that unless something is done about
this super quickly, you could find that Geelong and Broadmeadows are closed
down in no time at all...But the problem was that if the dealer side of the
business collapsed—that is, the 500 dealers—permanently, that is a demand capacity
that just disappears immediately, as against local manufacture and as against
imported vehicles.[5]
2.5
Mr Cohen gave evidence on how quickly he though the impact could flow
through to vehicle manufacturing:
It is a very quick flow-through actually. The way the
Australian manufacturers operate—as do the worldwide manufacturers—is that they
need a significant lead-time for customer orders. When I say ‘customers’, I
mean dealers. The extent of the financial crisis affecting manufacturers and
the cost of working capital means that these manufacturers cannot afford to
hold a lot of stock. It is very costly in cash flow for them. The philosophy of
‘just in time’ is very important so that, when a vehicle is manufactured, it is
within a few days invoiced and the manufacturer is paid for that and the
vehicle is shipped to a dealer. If the dealer cannot fund that stock, it
quickly reflects back on the manufacturer and a build-up of stock occurs. If
that is not resolved, the factory has to shut down because they cannot keep
forwarding. It is a very quick and rapid cause to the manufacturer.[6]
2.6
The withdrawal of GMAC and GE Money Motor Solutions from this sector was
seen as particularly problematic for dealers in rural and regional areas. Mr Cohen
warned:
It has been our experience that the major financiers that
remain in the market have not been very ambitious to service those dealers.
These are typically family owned businesses, smaller rural dealers. They are
very critically important to their city or town, and play a very big part in
their infrastructure and in the local economy. However, in relation to the
attractiveness of automotive financing, it is a specialist activity and a lot
of the general financiers, in our opinion, are not very much interested in it.[7]
2.7
Treasury also referred to the possible impact on Australian
manufacturing and employment arising from curtailment of the car dealer
network:
The Australian automotive industry is a very significant part
of our manufacturing base. Obviously it employs a large number of people,
particularly in Victoria, South Australia and parts of New South Wales. Then
you have the flow-on effects of the automotive components suppliers and
producers. Clearly if the dealer network is contracting or is in any other way operating
at a suboptimal level, no doubt that is going to impact on the ability of not
only domestic manufacturers but also the importers.
We often forget that a lot of these dealers are not simply
associated with GMH or Ford, but we are talking about dealers that sell a
foreign brand of vehicles. But they too, of course, also employ local
Australians and local communities. To the extent that this liquidity issue had
not been addressed, there is no doubt that both the Australian automotive production
side of things would have been adversely affected, as would have been the ability
of a range of small businesses in all parts of Australia involved with the car
industry. They too would have been adversely affected by any significant
curtailment of the car dealer network.[8]
Establishment of the Special Purpose Vehicle
2.8
In response to the announcement by GMAC and GE Money Motor Solutions, on
5 December 2008, the Prime Minister and Treasurer announced the establishment
of a Special Purpose Vehicle (SPV), also known as OzCar.[9]
2.9
The SPV will be funded by the four major banks (from the issuing of
securities) and administered by Credit Suisse as Programme Manager. The SPV was
legally established as a trust on 2 January 2009[10]
but has not yet been activated.[11]
The SPV will only advance loans to eligible dealers until 30 June 2010.
2.10
Treasury explained the governance of the SPV:
OzCar is the trust facility, managed and operated by the
private sector. It has an independent trustee. It is the financiers working
with the trustee who ultimately make all lending decisions once the facility is
activated. Treasury’s role has been to assist in establishing the trust
arrangements, including the eligibility criteria. Treasury’s role, moving
forward, is to work with the trustee on the Commonwealth’s exposure arising from
the guarantee.[12]
2.11
The Commonwealth Government is making no monetary contribution to this
trust. It is, however, providing a guarantee to securities issued by the scheme
which hold less than an AAA credit rating.[13]
The bill under consideration provides an appropriation to fund claims made on
this guarantee, if required.
2.12
The contingent liability for the Government is estimated to be around
$550 million comprising 45 per cent of the remaining GE and GMAC loan books and
85 per cent of the Ford Credit loan book.[14]
The Explanatory Memorandum provides the following information regarding
possible risk to taxpayer funds under the SPV:
In the event that the Guarantee is called upon, any payment
made under it will reduce the underlying cash balance. The extent of the
impact on the underlying cash balance will depend on borrowers’ default and
borrowers’ ability to meet any SPV’s claims. Under the Series Notice, the
Trustee indemnifies the Commonwealth (out of the assets of the Trust) against
any amounts paid or required to be paid by the Commonwealth under the
Guarantee.[15]
2.13
The Dealer Eligibility Criteria ensure that the SPV will only be able to
advance funds to solvent dealers. The Eligibility Criteria announced by the
Treasurer on 19 December 2009 required dealers to meet the following conditions:
- Must currently be financed by an
exiting financier, i.e. GE Money Motor Solutions or GMAC;
- Is currently a new car dealer or a
mixed dealership selling both new and used cars from the same business; or is
currently a dealer in new motorbikes; boats; caravans; trucks and commercial
vehicles with wholesale floorplan finance provided by GE Money Motor Solutions
or GMAC;
- Must demonstrate that the
dealership is a viable business consistent with the usual commercial lending
criteria of recognised finance providers;
- Must be able to present up to
date, accurate and comprehensive information on all aspects of the business as
may be required by recognised and participating finance providers.
-
[agree] to regular audits
consistent with best practice industry standards.[16]
2.14
It is anticipated that dealers receiving loans from the SPV will do so
at a higher rate of interest than from other credit providers.[17]
2.15
The SPV has been welcomed by stakeholders, including the MTAA and the
Australian Automobile Dealers Association (AADA):
MTAA and AADA have been involved from the outset in the
development of the Car Dealer Financing Special Purpose Vehicle (OzCar) and
believe it provides a positive and coordinated resolution to the financial and
liquidity crisis motor vehicle dealers face as a result of the withdrawal of
financiers from the Australian market.[18]
Size of the SPV
2.16
It was originally estimated that the scheme would require $2 billion. Treasury
explained how the original figures were derived:
There was no actual rocket science behind the original $2
billion estimate. The original $2 billion estimate was based on the assumption,
given the announced departures by both GE and GMAC, and given what we had been
told up to that point by the remaining market players who are not that large in
number—I am mainly talking about Esanda, St George, Capital Finance, Nissan
Finance, BMW, Volkswagen, Toyota Finance, these small industry capture finance companies—that
they did not have the scope nor the time to do the due diligence necessary to
grow their loan books to accommodate GE and GMAC dealerships. Also noting that,
at that time, late November, early December, GE and GMAC were telling the world
that, come the end of January, they were out of here. The $2 billion was
basically an aggregation of the outstanding loan book at that time of GE, GMAC
and Ford Credit.[19]
2.17
The estimated size has been revised downwards. In his second reading
speech, the then Assistant Treasurer provided the following explanation:
It is very pleasing that since the 5 December announcement that
most of the former GE and GMAC dealerships have managed to secure alternative
wholesale floor plan financing, primarily through remaining lenders.
This and the commendable commitment by both GE and GMAC to
wind down their loan books in an orderly manner have meant that it has not yet
been necessary for the OzCar SPV to issue securities and lend funds.
There is no doubt that the establishment of the OzCar
facility so quickly after GE and GMAC announced their planned exit from the
Australian market provided a critical boost to confidence when it was needed
most...
As a result of the success of this initiative, the financing task
now confronting us is much less than initial expectations.
Last December, it was expected that OzCar would need to finance
around $2 billion worth of loans.
This has come down to around $850 million. The final figure
will probably be less.[20]
2.18
Since the Federal Budget, Treasury has advised that size of the SPV may
be 'no more than $450 million in aggregate'.[21]
2.19
This is regarded as a sign of the positive response to the SPV by
industry:
...it has been a positive response by knowing that there was a
backstop, if they needed it...from around January or February of this year—and
we definitely very much welcomed this—the remaining financial institutions,
such as the Esandas, the St Georges, the Capitals of our marketplace, suddenly
developed a new appetite and started taking on a lot of the dealerships from GE
and GMAC that otherwise would have been stranded.
That was pivotal, but at that very sensitive time, when GE
and GMAC had flagged that, come the end of January, they would be leaving. For
these dealers, knowing that there was that backstop and that obviously we were
working very hard behind the scenes to put in place and activate, was a very
important psychological plus.[22]
2.20
The committee notes that the evolving nature of the scheme, including
estimates of how much will be required to fund the SPV, is not in itself
surprising given the speed of events and very uncertain economic climate.
Changing parameters – the inclusion of Ford Credit
2.21
On 13 May 2009, the Treasurer announced that Ford Credit would be
included in the SPV.[23]
In his second reading speech the then Assistant Treasurer explained:
This decision has been necessary in light of the immense
pressures the global financial crisis has placed on Ford Credit's ability to
continue to raised the liquidity it needs to support the Ford dealer network
and, through that network, the manufacturing operations of Ford Australia.[24]
2.22
Ford Credit will be one of the major users of the SPV, with up to $550
million of the total amount allocated to cover their involvement. Treasury had indicated
at estimates hearings that the scheme might not be necessary without the
decision to include Ford Credit:
...if the recent decision to allow Ford Credit to participate
in the facility had not been taken, I would go as far as to say that there will
not be a need to activate OzCar at all, because the market has actually had a
much more positive effect.[25]
2.23
Some minor confusion was expressed before the committee as to whether
the inclusion of Ford Credit represented a change in the parameters of the SPV,
or was something that was an option from the start. Mr Delaney of the MTAA told
the committee:
My understanding—and I say that I was not a party to every
bit of deliberation or every assembly of people or officials working on it—was
that it was designed specifically to admit any other financier whose
circumstances might come over time to require that it be admitted. That was
always my understanding.[26]
2.24
Treasury confirmed its earlier evidence:
There was a change in the parameters of the facility when we
decided to include Ford Credit. Essentially, what we were doing, we were using
OzCar, the SPV, as a means to provide liquidity to a financier who would then
support its existing dealership network, whereas before we were providing
liquidity support to viable car dealers who had lost their financier. So there
was a change in the parameter, there is no doubt about that.[27]
2.25
Given the dynamic economic environment and the speed in which decisions
were made, such misunderstandings can easily occur. In any case, the committee
regards the decision to include Ford Credit as a prudent response to changing
economic circumstances, and commends the initial design of the scheme as being
sufficiently flexible to adapt to new circumstances.
Impact on confidence
2.26
Many of the witnesses indicated that the SPV has already had a positive
impact in restoring confidence in the market, even prior to its activation. The
importance of confidence to the market was noted by Treasury:
...confidence in a market economy is important in all
industries and all sectors at all times, I would argue. It is no exception with
respect to the car industry, which is obviously very much a consumer-driven
industry.[28]
2.27
Mr Delaney of the MTAA described the atmosphere immediately after the
announcement by GMAC and GE Money Motor Solutions of their intention to
withdraw from the Australian market:
We did not, however, expect a precipitate announcement by
GMAC and GE that they were simply leaving the market in the manner that
occurred. But against the background of the global financial crisis, perhaps in
retrospect it should have been unsurprising. What was difficult about it, and
what we complained about to them vigorously, was that it was not only an announcement
but a declaration that they needed their money returned by December. That is to
say that, some time between 23 and 24 October and December, all of the affected
car dealers—as I said, we believe that there were near to 500—were somehow or
other supposed to be able to get set with alternative finance in very large sums.[29]
2.28
He added:
I have been a lobbyist for a long time. I have never had
anything like it in the way of being assailed by really troubled constituents.
I did. It came from everywhere, from absolutely everywhere. It was of such an
order and there was such panic abroad that we had to immediately petition the
government at the highest levels to see what might be able to be done.[30]
2.29
Treasury cited the fact that the amount of money required to fund the
SPV is lower than originally feared as evidence of an increase in confidence in
the industry:
...we certainly see the announcement of OzCar in late 2008 as a
significant confidence building initiative. As I indicated a few minutes ago,
up to this point, there has not been a need to activated OzCar to write one
single loan which, in a sense, has been a good outcome. The market has picked
up those dealers who would otherwise have gone out of business.[31]
2.30
The positive effect the measure has already had on confidence of the
market was confirmed by industry representatives:
That intervention is a public good and it can, and has
already in this case, secured a market correction. That is entirely appropriate
and valuable. No motor trader through this measure will secure market money at
a lower cost. There are no distortions to the hitherto operating market in these
arrangements, and the liquidity and confidence that has been secured is all
that is necessary to kept market appropriately operating.[32]
2.31
The committee is encouraged by this evidence of positive response by
industry.
Recommendation 1
2.32
The committee recommends that the Senate pass the bill.
Senator Annette Hurley
Chair
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