The Chapter 11 bankruptcy filing and subsequent potential reorganization of Chrysler LLC (Chrysler), may negatively affect rating performance on assorted Chrysler-affiliated auto ABS (asset-backed securities) transactions, according to Fitch Ratings.
Among the deals that may see increased pressure include Chrysler Financial LLC's (Chrysler Financial) outstanding dealer-floorplan ABS, and the rental car ABS issued by Dollar Thrifty Automotive Group (DTAG) due to their exposure to Chrysler vehicles in these pools. Fitch is also focused on the affect of the bankruptcy on Chrysler's auto loan ABS. However, no immediate rating actions are being contemplated by Fitch on these transactions at this time, given the evolving nature of the bankruptcy and minimal information available at this time.
A Chrysler Chapter 11 bankruptcy filing, government and third-party financing provided, and the announced alliance with Fiat S.p.A., is a less damaging outcome than had the company filed for Chapter 7 bankruptcy with no support. Fitch remains concerned with the impact that the bankruptcy may have on vehicle values for all transactions. Additional concerns include the financial and operating status of Chrysler Financial, given its role as primary servicer for the loan and dealer floorplan ABS. Furthermore, Chrysler's ability to repurchase program vehicles is a risk for the rental car ABS. For auto loan ABS, should loss pace accelerate in the short term, subordinate bonds would likely face negative rating actions.
Fitch expects to receive more details in the coming days on all asset classes from all parties involved.
Rental Car ABS:
Fitch currently rates two Rental Car Finance Corp. (RCFC; both issued by DTAG) transactions. Fitch assigns 'BB' ratings to the class A-1 and A-2 notes for series 2005-1, as well as a 'BBB+' rating to the class A notes for series 2007-1.
These transactions have large concentrations of Chrysler vehicles; as of the end of March 2009, 2005-1 composed approximately 89 percent Chrysler vehicles and 2007-1 75 percent. The majority of these vehicles in each transaction are purchased as non-program vehicles, exposing DTAG to potential risks stemming from declines in vehicle values upon disposition of the vehicles. The remaining minority of the Chrysler vehicles is program vehicles, and exposes DTAG to the ability of Chrysler to repurchase these vehicles back from DTAG under Chrysler's repurchase obligation. Chrysler may be limited in its ability, or may not be able at all, to entirely fulfill this obligation to repurchase these program vehicles due to the bankruptcy and lack of financial strength. No immediate additional rating actions are anticipated, although Fitch will continue to monitor the ongoing bankruptcy proceedings to assess potential impacts on Chrysler's ability to fulfill its repurchase obligation, and the impacts on vehicle values related to non-program vehicles that are disposed of by DTAG.
Fitch will continue to closely monitor the performance of the transactions, and will take further rating actions as deemed necessary.
Auto Loan ABS:
A potential impact would be related to protracted declines in retail and wholesale values for Chrysler vehicles. Fitch witnessed vehicle value declines in the range of 10 percent-25 percent in previous brand eliminations; however, the Chrysler bankruptcy is a much larger scenario relative to prior examples so the impact on vehicle values may be greater. Decreases in wholesale values will adversely affect recovery rates on future defaults, leading to higher cumulative lifetime losses. Chrysler stated that the company will honor consumer warranties and the U.S. Treasury is making nearly $300 million available as a backstop on the orderly payment of warranties for cars sold during the restructuring period. This provides some benefit to consumers and marginal support to vehicle values. Fitch does not expect rapid increases in consumer defaults to occur as a result of the filing.
Any potential deterioration in the servicing capacity of Chrysler Financial could affect auto loan ABS. Although Chrysler Financial, as a separate company, has thus far avoided a bankruptcy filing, its current financial position and liquidity, closely linked with that of Chrysler's, are expected to be further impacted by the Chrysler filing. Given recent announcements that GMAC LLC will be retained to meet the future vehicle financing needs of Chrysler, the ongoing viability of Chrysler Financial and its ability to maintain key servicing personnel and operations at prior levels is uncertain. The current scenario is evolving, and Fitch is awaiting further information from Chrysler Financial on their servicing role, ability to service, and potential impact on the transactions. While Fitch does not believe it is a near-term likelihood, any disruptions in, or transfers of, the servicing of the outstanding transactions may impact performance.
Despite these risks, to date, Chrysler Financial has exhibited adequate servicing of their auto-related ABS transactions historically. In addition, Fitch believes Chrysler Financial is the most-suited party to service their transactions, and that an efficient servicing transfer would be difficult given the size of Chrysler Financial's portfolio and certain transactions.
Dealer Floorplan ABS:
Heightened risk surrounds the potential for significant increases in dealer bankruptcies, and ultimately defaults in Chrysler Financial's outstanding dealer floorplan ABS. Fitch expects the Chrysler filing to have a negative impact on new vehicle sales levels at existing dealers, further weakening the financial profile of the franchised dealer base. Additionally, Chrysler has indicated its expectation to significantly reduce its franchised dealer count in conjunction with any potential reorganization. What funding and support Chrysler can or will provide related to the outstanding inventory of vehicles for these dealers, as well as any retained dealers, is unclear and may have a material impact on loss severity under floorplan lines for dealers that go out of business.
Chrysler Financial's role in servicing these transactions is imperative. Their knowledge of and relationship with the dealer base, maintenance of inventory audit frequency and dealer monitoring, and effective management of dealer workouts and liquidations are key to limiting losses. These functions are not easily transferable to a third-party servicer.
Fitch currently rates one outstanding Chrysler Financial dealer floorplan ABS, Master Chrysler Financial Owner Trust (f.k.a. DaimlerChrysler Master Owner Trust), series 2006-A, totaling approximately $1 billion. Fitch downgraded 2006-A to 'A' and placed the series on Rating Watch Negative on April 14, 2009 citing ongoing concerns surrounding the US domestic auto industry and heightened risk of a Chrysler bankruptcy and liquidation scenario. As the bankruptcy filing was a Chapter 11, no immediate additional rating actions are anticipated, although Fitch will continue to monitor the ongoing bankruptcy proceedings to assess potential impacts on dealer defaults and vehicle values in the short-term. Additionally, the transaction has entered into early amortization as a result of the Chrysler bankruptcy filing and will be repaid in full within three-to-five months should monthly payments rates and other performance metrics remain at current levels.