IMPEACH BUSH

NEW YORK -(Dow Jones)- The finance arms of Detroit's Big Three auto makers are selectively tightening credit to many financially strapped dealers, making it harder for consumers to get loans, particularly for new cars.

The credit squeeze is likely to ram down the brakes on already tepid new auto sales because auto dealers use a large chunk of this funding to stockpile new cars. At the same time, it also offers an opportunity for Chrysler Financial, GMAC LLC and Ford Motor Credit to whittle down their bloated retail networks as they struggle to shore up capital.

"Given the credit crunch and problems of funding, these lenders will turn up the heat on dealerships," says Jerry Breen, a senior director at ABSNet. ABSNet is a data provider for structured securities, including those made up of loans by auto finance companies to their dealers.

"The harder it is for dealerships to get funding, the harder it will be for the consumer to get a loan for a car," said Breen. "This will only exacerbate a bad market for new car sales."

The tightening of funds to auto dealers underscores another way the credit crunch is affecting large companies and small business owners. In a similar move, lenders are shrinking credit to restaurant franchisees, making it harder for owners to remodel existing locations and buy new restaurants. General Electric Co.'s (GE) GE Capital and Bank of America Corp. (BAC), large commercial lenders, are becoming more stringent in pricing and issuing loans for new franchisees.

Most recently, Bill Heard Enterprises Inc., one of the largest Chevrolet dealers in the U.S., filed for Chapter 11 bankruptcy protection Sunday after shutting down last week.

The company, which operated 14 Chevy dealerships in seven states, sought Chapter 11 protection in the U.S. Bankruptcy Court in Decatur, Ala., listing assets and debts of between $500 million and $1 billion each. The company, which opened its first dealership 89 years ago, put nearly 3,200 people out of work when it shut down Wednesday.

In court papers, Bill Heard said high gas prices, the downturn of the U.S. economy and the reluctance of some auto lenders to extend credit to customers have caused new car sales to plummet, prompting a "financial liquidity crisis" at Bill Heard dealerships.

Floor Plan Credit: Nuts & Bolts

"Liquidity is priceless now," says Chris O'Connell, an analyst at DBRS, a ratings company. This applies across the board to consumers, dealers, manufacturers and finance companies, he added.

The weakening credit profiles of General Motors Corp. (GM), Ford Motor Co. (F) and Chrysler LLC and their finance arms - GMAC, Ford Motor Credit and Chrysler Financial, respectively - are adding a new challenge for dealers. In the past, these finance units were key elements in how Detroit pumped up vehicle sales. They typically offered dealers easy credit to help them sell as many cars and trucks as possible, even if they gave away some of their margin to do so.

But now that the car makers and their once-lucrative financing units are racking up losses and struggling to raise funds themselves, they are getting tougher on dealers with weak finances. And since GMAC and Chrysler Financial are both controlled by private-equity group Cerberus Capital Management LP, each is now being run to maximize profits, not auto sales.

"The current credit crisis is clearly negatively affecting the overall market environment," said a GMAC spokeswoman. While GMAC continues to offer financing to its dealers, it "has made some recent changes to this business with a goal of improving risk and pricing."

An official at Ford Motor Credit didn't return a call seeking comment.

While declining to comment on the specifics of financing agreements between dealers and Chrysler Financial, a spokeswoman said in spite of tighter credit conditions and higher borrowing costs, the finance arm is "committed to standing by our dealers to support their success and profitability."

One of the primary ways in which these auto finance arms lend to dealers is by extending credit lines. This "floor plan" credit is used by dealers to stock up on new vehicles. In this "pay-as-you-sell" model, the dealer repays its lender as each vehicle gets sold. This revolving credit line may be compared to the way a credit card works, where the balance gets paid down monthly according to the amount charged.

Bonds outstanding made up of floor plan loans of the three auto finance arms totaled $25.8 billion, according to ABSNet. Ford Motor Credit and GMAC lead issuance, with $12.7 billion and $10.6 billion, respectively.

While it is common practice for auto finance arms to periodically assess the creditworthiness of the dealerships they lend to, this process has assumed critical significance amid the scarcity of capital in the ongoing credit crunch. Adding to this is the slowing pace at which dealers are repaying these borrowings.

"Payment rates are clearly declining this past year. Lenders have to be more selective and cautious that money they are loaning to dealerships is going to be paid back," says ABSNet's Breen. "Certainly, as the economy slows further, there is going to be a ripple effect on the financing relationships between the captive finance companies and the dealerships."

For instance, in August, Chrysler dealers, on a three-month average, repaid 28% of the financing outstanding from Chrysler Financial, according to data compiled by ABSNet. These payments have fallen 40% from a year earlier. During the same stretch, the payments Ford Motor Credit received from its dealers was down 17%. Similarly, a GMAC transaction of loans to GM dealers shows that payments in August, based on a three-month average, also were 17% lower than a year earlier.

As dealerships pay back less on their borrowings to the auto finance arms, these lenders increase their rates and fees, making it costlier for dealers to keep buying new cars. Higher borrowing costs will erode dealer margins and translate into more expensive loans for buyers.

"Floor plan financing is the lifeblood for many of these dealers," says DBRS analyst O'Connell. The credit ratings company evaluates these types of loans. "The payment rate is going to cause major headaches if dealers cannot repay loans. From a captive finance company's view point, it's critical to consider a dealer's ability to repay loans on an ongoing basis."

In the long run, however, a dealer shakeout could help the Big Three by reducing competition and improving profits of the dealers that survive.

Higher rates and fees are a way of the finance companies telling their dealers that "we can't afford to operate the same way we used (to)," says O'Connell. "Manufacturers have tried to restructure dealer networks forever. Now they can and they are."

-By Aparajita Saha-Bubna, Dow Jones Newswires; 201-938-2137; aparajita.saha-bubna@dowjones.com

(Marie Beaudette and Paul Ziobro at Dow Jones Newswires and John D. Stoll at the Wall Street Journal contributed to this report.)

(END) Dow Jones Newswires

09-29-08 1631ET

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