NEW YORK -

Fitch Ratings offered some sobering assessments of current dealership finances on Monday when revising its dealer floorplan (DFP) asset-backed securities (ABS) performance outlook, mentioning some of the same unprecedented conditions dealer groups and principals now are facing as vAuto founder Dale Pollak did in an open letter posted on Good Friday.

Fitch revised this particular ABS outlook to negative as U.S. auto dealer networks backing these ABS transactions are suffering from a collapse in sales, shrinking revenues and growing liquidity risks.

“The combination of these factors has weakened dealerships' financial wherewithal and could impair their ability to repay dealer floorplan credit lines,” analysts said in a report sent to Auto Remarketing. “Fitch is actively monitoring dealership health and ABS transaction performance metrics, including trust monthly payment rates (MPR).”

Saying a dealer was “out of trust” oftentimes meant criminal activity occurred like a 17-count federal indictment against a Pennsylvania dealer surfacing last summer. But that’s certainly not the case nowadays as Pollak articulated at the beginning of his letter.

“My heart goes out to dealers and their families during the current COVID-19 crisis,” Pollak wrote. “I cannot imagine the loss, pain and uncertainty that every dealer is feeling at this time.

“In my time as a dealer, we saw recessions and other disruptions that caused tough retailing conditions,” he continued. “But none comes even close to what dealers are experiencing right now.”

Fitch pointed out its analysis showed strong trust performance through March along with trust dealer concentration limits and structural protections in place, including available credit enhancement.

“While heading into this downturn in better shape, Fitch believes dealer networks are facing a significant demand stress that will weigh down revenues and may threaten the viability of smaller dealerships,” Fitch said in its report.

“Additionally, material auto wholesale market operational challenges will complicate purchasing and selling of used vehicles as most wholesale auctions are closed, and Fitch has observed recent declines in wholesale auction activity and used values,” the firm continued.

Auto Remarketing recently reached out to experts from Cox Automotive, KAR Global, J.D. Power Valuation Services and Black Book to compile reports that went into more detail about the potential for a wholesale price rebound as well as how volume is tracking. The reports are part of having a Cherokee Media Group Premium Membership.

Details to become a premium are available here.

Turning back to store finances, Fitch explained its dealer floor plan outlook is based on a coronavirus scenario that includes a sharp sales contraction through the middle of the year, stabilization during the third quarter and a recovery unfolding in the fourth quarter and going into 2021.

“In this scenario, dealership networks are under heightened pressure in the next three months, including ABS trust MPR metrics as mentioned,” Fitch said.

“As the U.S. has been placed under lockdown and social distancing is in place, dealership foot traffic has collapsed with internet sales unlikely to make material impact on sales or revenues,” analysts continued. “Plummeting sales has come on the back of government-mandated closures of dealer showrooms enacted by state authorities, and to date the majority of showrooms are closed while only service/repair divisions remain open as essential services.

“This time of the year is typically the strong spring sales period, but this is not the case currently and sales have sunk through near mid-April now and trying to forecast sales is too uncertain to predict,” Fitch went on to say.

Fitch pointed out U.S. dealer networks entered March in a “stronger” position than when they faced the 2008-2009 Great Recession, with overall more stringently managed debt profiles, solid profitability, relatively stable costs and networks that are essentially not “overdealered” with tight capacity across most markets.

While many larger and publicly traded franchised dealer groups have issued furloughs, Fitch gave a cautious assessment about single-point stores.

“All dealers face heightened risks from the massive hit to sales and revenues, and thus been forced to deploy cost-cutting measures in all operational areas, including widespread employee layoffs and furloughs,” Fitch said. “They have looked for support for their related OEM and captive finance lenders as mentioned prior. It is the smaller, more vulnerable dealerships that face greater short-term threats to their businesses, specifically dealers with one or two locations that are thinly capitalized with low levels of liquidity or cash on hand to weather this crisis.

“While Fitch acknowledges that government support may provide support to OEMs and dealer networks, the form of support and details are unclear at this point and the agency will consider implications as more information becomes available,” analysts continued. “OEMs are stepping in to varying degrees offering retail loan and lease payment deferrals, and high incentive sales programs to boost sales and support dealership revenues, but this is not expected to material offset the massive decline in overall sales in the short term.”

Like Fitch, Pollak also recognized that the next few months are going to be crucial for dealership survival. He outlined an array of recommendations about what dealers could do with their current used-vehicle inventory while working with potential buyers in revamped ways to retail units and generate crucial revenue.

Pollak closed his passionate letter with this line of thinking.

He wrote, “the current crisis proves that we can make significant changes in our lives and businesses when circumstances demand them. This is no small achievement.

“It’s also a reality that gives us great optimism and hope about our ability to face what will ultimately be a much different future,” he continued. “Take a moment. Recognize how quickly we’ve changed beliefs and behaviors in the current crisis.

“Then, let’s remember how far we’ve come, in such a short amount of time, as we face the changes life and business will bring us in the days and weeks ahead,” Pollak concluded.