For 17 years, Simsbury-based Mitchell Auto Group has relied on Sovereign Bank for its inventory financing, which has helped the auto dealer fill its lots with an array of Volvos, Saabs, Dodges, Chryslers and a wide collection of other brands.
But in December that relationship changed dramatically. That’s when the auto dealer received a letter in the mail notifying it that the bank was getting out of the floor-planning business, and that it had to find an alternative source of financing.
In good times, that news may not have been a big deal. But as credit has dried up, finding a new source of financing has been difficult, some even say impossible.
Floor-plan financing, also known as inventory loans, is the lifeblood for U.S. auto dealers, allowing them to purchase vehicles from manufacturers and carry them on their lots until they find a buyer.
“The problem is that nobody is taking on new customers or loans right now,” said Mitchell Auto Group President Mark Mitchell who, nearly five months after he received the notice, has been unable to secure alternative financing.
Mitchell is not alone. Nearly 45 Connecticut auto dealers received that same letter late last year and more than half of them have been unable find alternative lenders, according to James T. Fleming, president of the Connecticut Automotive Retailers Association.
Although the bank has not yet yanked credit from the dealers or called back their loans, the threat is weighing heavily over the industry.
If alternative financing cannot be found and Sovereign Bank eventually demands its loans back, it could mean the demise of a large number of local dealers.
“These are the types of credit auto dealers need to survive,” Fleming said. “If they aren’t able to find an alternative and the loans are called back, they’d be out of business within weeks.”
Andrew Gully, a spokesperson for Sovereign Bank, which was acquired by Spanish-based Santander Bank in January, said that the bank is currently working with auto dealers to help them find alternative financing and that it has no firm timetable in place for when it might call those loans back.
Gully said a poor economy, the auto industries’ struggles, and a “strategic review of the company’s business lines” forced the bank to flee the floor plan-lending business.
“This was a Sovereign decision that goes back quite awhile,” Gully said.
In the December letter, the bank requested that local dealers refinance or pay off their outstanding loan obligations “as soon as possible.”
Without that line of credit, dealers would be unable to purchase new cars, and be forced to pay off any outstanding loans. In most cases that would be a significant expense because an average Connecticut car dealer carries about $15 million worth of inventory, Fleming said.
If they are unable to pay, the bank would use the vehicles as collateral.
“It is a big problem,” said Ken Crowley, president and CEO of Crowley Auto Group, which consists of seven dealerships in Bristol, Plainville and Hartford.
Crowley, whose company also does business with Sovereign Bank, said he too is having difficulty finding alternative financing. He said he has found a new lender for his Nissan dealership, but that he is still looking for help for his other dealerships.
“Nobody wants to take you,” Crowley said. “You have dealers that are in good shape financially but still nobody wants to be in the car business.”
To make matters worse, rates and fees to renew lines of credit are excessive, some requiring as much as $20,000 up front, Fleming added.
Crowley said auto dealerships have traditionally weathered recessions fairly well, but that the current financial crisis is unlike anything they’ve experienced because the “very oil of the industry has dried up.”
“Unless we get consumers back in the marketplace, all the stimulus funding in the world isn’t going to change things,” he added.
The recession and plunging auto sales have taken a toll on car dealerships across the country and in the state. Since January 2008, 50 new-car dealerships out of 325 have gone out of business, including 22 since the beginning of this year.
Fleming said industry lobbyists have been asking the federal government for help, but have had limited success so far.
Several auto dealer associations, for example, have asked the federal government to loosen eligibility requirements to participate in the Federal Reserve’s Term Asset-backed Loan Facility, a new federal relief program that aims to increase credit to consumers and auto dealers. But many auto finance companies can’t participate in that program because their credit ratings have been downgraded.
Fleming said that he has also been in talks with the state, but that there is not enough money available from it to fix the problem.
In the end, Mitchell, who has applications pending with several banks, can only hope credit markets eventually thaw.
“It’s a crap shoot,” he said. “It’s like playing Texas hold’em poker.”
“Great article – I agree “Unless we get consumers back in the marketplace, all the stimulus funding in the world isn’t going to change things,” he added.
Reader response:
“Great article – I agree. (“Unless we get consumers back in the marketplace, all the stimulus funding in the world isn’t going to change things,” he added.) Get the money back into the hands of the consumer – that is what is going to make the economy start growing again.” — C. Farrick, Personally Yours Custom Embroidery and Decorated Apparel
