Plunging Used Car Prices Wreak Havoc On Rental Car Bondholders

Tyler Durden's picture

Once hedge fund darlings, almost no one is more perfectly aligned to get obliterated by falling used car prices than America's auto rental companies, Hertz and Avis.  As Bloomberg notes today, on a combined basis, Hertz and Avis dump about 400,000 vehicles per year into the used car market and operate fleets that are multiple times larger. 

And with used car prices plunging, bondholders are starting to get slightly anxious about the collateral impact of writing down billions of dollars worth of capital assets.

Debt issued by Hertz Global Holdings Inc. and Avis Budget Group Inc., which had traded at or above par in recent years, tumbled to new lows earlier this month amid signs that used-vehicle prices are dropping twice as much as expected. That’s bad news for companies that collectively have to dispose of about 400,000 vehicles a year, and especially for Hertz, whose junk-rated debt is teetering close to a downgrade.

 

Hertz and Avis typically buy the cars outright from manufacturers or get them on a contract with a buyback agreement. The latter, called program cars, cost more because manufacturers assume the resale price risk. Vehicles that Avis and Hertz buy outright are called risk cars because rental companies make their own assumptions about what the cars will be worth when it’s time to sell. Combined with closely held Enterprise Holdings Inc., the three companies control more than 95 percent of the U.S. rental fleet, according to Manheim.

 

Program cars made up only 20 percent of Hertz’s U.S. fleet last year, according to a company filing, less than half the 44 percent for Avis’s total fleet. Hertz will try to buy more of those this year, Chief Financial Officer Tom Kennedy told investors during a February earnings call.

Car Bonds

 

Of course, as J.D. Power pointed out in it's most recent "NADA Used Car Guide Industry Update," the flood of lease returns has just started to push used car prices lower....

Used Car Prices

 

...and, unfortunately, the volume of lease returns is only expected to grow...

Auto Leases

 

...all of which Morgan Stanley thinks could spark a 50% decline in used car prices over the coming of years. 

Used Car Prices

 

All of which begs the obvious question of who is right...auto supplier equity holders or Hertz bondholders?

Cars

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besnook's picture

what about the lease cars driven by consumers. there have to be more cars leased than sold just as a matter of having a 200 dollar payment to lease compared to a 400dollar payment to own for your average dumbass car aquirerer. leasing companies will be upside down on all their cars in a coupla years.

BennyBoy's picture

 

Who coulda seen this coming?

Any dumass bondholder who could add and subtract.

Manthong's picture

 

Oh gee…

..just the thought of a two year old AMG Mercedes for a couple two or three hundred a month gives me Chris Matthews tingles up my leg.

 

MalteseFalcon's picture

"All of which begs the obvious question of who is right...auto supplier equity holders or Hertz bondholders?"

As long as the FED buys stocks or convinces a third party to buy stocks, and the FED holds down interest rates, both will be right.

Print Moar Money, PMM.

Handful of Dust's picture

"Americans are NOT deadbeats!"

 

~ Soweeto bin Bama

Manthong's picture

But on second thought, "all I know is that my model year 2000 Jeep Grand Cherokee Limited Garage Queen with 49K miles is holding its value OK".

And I will not ever buy a vehicle with an internet connection.

I will drive a Model A around the robots first.

Joe Sichs Pach's picture

Be sure to change out those calipers and rotors. I hope you don't have that asinine hydraulically driven fan. That vintage JGC turned me off of them permanently.

Manthong's picture

Fan is belt driven.

Been through one set of front rotors in 17.25 years.

Full time 4WD has always clunked a bit but has proven reliable so far.

Steering seems like there is no hydraulics but it keeps the arms in tone.

PTR's picture

"Stop making fun of me!  I am NOT ignorance!"

post turtle saver's picture

no one with any money or sense wants to pay the maintenance schedule on a two year old AMG Mercedes... there's a reason they depreciate so fast...

Manthong's picture

Agree...

I thought twice..

“But on second thought, all I know is that my model year 2000 Jeep Grand Cherokee Limited Garage Queen with 49K miles is holding its value OK.

And I will not ever buy a vehicle with an internet connection.

I will drive a Model A around the robots first.”

BTW.. one ‘s life is incomplete until one drives an S Class down the Autobahn south of Munich towards the mountains at 200 Km/hr.

Pairadimes's picture

Looks to me like deflationary impulses are starting to accumulate. This catches the Fed in the worst possible position of having assumed they beat deflation. 

Manthong's picture

So…methinks that a half dozen years or so in the future, the first two years of Trump will be recognized as a bust, not a boom.

 

Abbie Normal's picture

or 250 kph on the Montanabahn, back in the days without speed limits.  Car felt as if it was ready to lift-off.

Manthong's picture

With or without JATO?

http://www.darwinawards.com/darwin/darwin1995-04.html

Consuelo's picture

 

 

 

Just to have the ASC mechanic touch one of those things is a $grand.

 

 

Haus-Targaryen's picture

Can you guys imagine the mass dumping of inventory into the market if one of the big three liquidate? 

Who wants a brand new Ford Fusion with 1,500 miles for $5k? 

I'll take two please. 

Sandmann's picture

Did Chrysler liquidate ? Did GM ? Trump won't let them down -- Son of TARP

new game's picture

looking for a cummins on the cheap; oh yea, patience is a banks loss cast onto society.

a big thanks in advance to us taxpayers...

Haus-Targaryen's picture

I was talking about Avis, Hertz and Enterprise. 

If we have rental car companies that are TBTB and the .gov steps in to save one of them then we've gone full USSR styled managed economy. 

GunnerySgtHartman's picture

Did Chrysler liquidate ?

Not yet.  Hang tight - it will eventually happen.

ZeroPoint's picture

They never markdown below cost to recover capital. Never. That would be a real loss on the books. The only time that happens when it's Chapter 7 time.

You see this all the time with home owners who refuse to sell their house at market price when they can no longer afford the payments. They lose the house to the bank, get evicted, ruin their credit, and the house still ends up getting sold at market price by the bank unless they keep it off the market - for the same reason.

No one wants to take a loss.

chubbar's picture

You will never see a good deal like that, just like when hundreds of thousands of homes were foreclosed. You never had the opportunity to go in and buy a brand new or fairly new home for 50% of sales price, the banks just kept them off the books. They could give a shit about offloading a depreciating asset because they are always backstopped by the FED. I anticipate large areas of parked cars rusting away, similar to the airplane junk yard in Arizona (or wherever it is). Just the way it is. The average joe can't get ahead with the form of financial repression this gov't practices.

Ace Ventura's picture

Say it with me, people:

CASH FOR CLUNKERS, DELUXE EDITION!

I just don't see how this doesn't happen in order to bailout the industry again. Gets rid of older (and in many cases still perfectly functional) used car inventory, allows room for the lease-returns to move in and replace, while giving another artificial boost to new car sales.....because for only another $2,000 above used you can drive a new car!

#pullthatdemandforwarddammit

Stan Smith's picture

+1  and many more.

As someone who tracks a bit for my job, the reality is there was thousands (if not well more) homes that were foreclosed on that banks simply held on to.    Obviously there were tons of foreclosures anyway,  but there were plenty that simply didnt go back out there because banks (or holding companies) simply held on to them to wait it out or even rent.   

I dont know how that can happen to that degree with Cars,  but im quite sure they'll try.

Fiscal Smegma's picture

Exactly, I saw this coming last year and dumped my holding of rental bonds from my trans portfolio.

 

evoila's picture

So you realigned last year? Was it covered by your insurance?

Fiscal Smegma's picture

Nope, I had to do a cash infusion. 

BorisTheBlade's picture

Read through Manheim used cars report, there's gonna be a flood soon: https://publish.manheim.com/en/services/consulting/used-car-market-report.html

OFF-LEASE VOLUMES WILL RISE SIGNIFICANTLY
Given the growth in new lease originations, we can be assured of a steady rise in off-lease volumes. And since the increases in lease penetration rates were not consistent across manufacturers, neither will be the changes in off-lease volumes. Note, for example, that although total lease originations in 2015 were more than three times higher than in 2009, new lease volumes have grown by a factor of 15 or more at GM, FCA, and Hyundai/Kia.

new game's picture

worked there(quit in Feb) and saw the sea of cars, all late models. toyota lease returns alone was mind boggling, and then there was nissan, mazda, ford. gm is not usoing manhiem, but i can imagine that raft of late model resale /sea of cars and light trucks. fuken eh. seeing is believing.

clogged shitter comes to mind...

hotrod's picture

New game,  I live around Atlanta, can an individual go to Manheim south of Atlanta and buy a used car?  Have seen the lots huge and stuffed.

m11nine's picture

not the one by the airport. the lower-tier auction on southside (Metro Ave, former aka stewart ave) near 75-85 merge used to but don't think they do anymore.

dealers don't want the public there so its pretty strict.

MaxMax's picture

Dealers don't want the public to know their costs on used cars.  You need a dealer's license to get in.  Sometimes you can find a dealer that will get bid for you.  Also, you take a risk because it is pretty much do your own inspection before you bid. You can't take it back later when you find out it was in an airbag accident, flooded, etc.  But dealer margins on used cars are big - typically 30% or more.

roddy6667's picture

I used to have access to the big auction in East Windsor, CT. A dealer brought me in as his "driver". I would pick cars out of the line and tell him what my top bid would be. If he got the car I paid him cash. You can buy the cars for about half of what it would sell buying from a private individual, using Kelly Blue Book or Edmund's pricing. I immediately resold these cars from my yard.

Car dealers make a lot more on the sale of a used car than a new one. The new one makes money on repairs in the future.

j0nx's picture

Honda dealers still charging premium prices for their new cars. Maybe they didn't get the notice or once again this doom and gloom is BS. Not holding my breath for cheap cars any more than I am for another real estate crash.

FreeShitter's picture

I hear ya...where I live used car and new car prices are high as fuck

canisdirus's picture

Where I am, used car prices are so high that you're better off buying new, particularly if you need to take a loan on it. I don't know how this works, but I know it sells a lot of new cars.

Manthong's picture

Chase has a blurb on their site about REFINANCING YOUR AUTO LOAN...

WTF, over?

Slavery is alive and well in the US.

PTR's picture

Bankers gotta keep the money velocity going or else.

GunnerySgtHartman's picture

GMC dealers here are doing the same thing ... a USED GMC Sierra (2014 model) for $50k, and the idiots are buying at that price.  And it's not even a dually.

Ace Ventura's picture

Location, location, location. I see the same phenomena here in central Virginia. Anywhere there is concentrated corporate, banking, or government money...conditions will appear normal or even booming compared to more typical regions.

Plus, as others have mentioned, don't underestimate just how much the average boobus amerikanus is willing to stretch their budget so they can perpetrate in style in that choice new Yukon Denali or Hemi Challenger. Eight year financing?! Gimme somadat!!

Sandmann's picture

They are contractors and have pushed the Receivables out to Suckers and the Auto producers have given them incentives so the car lessors may be okay. Anyway Trump will bail out the banks and finance sector since he is well aware of how they can squeeze over-indebted borrowers like himself and Jared

besnook's picture

back in the day they used to make the lease companies hold the risk. with today's cdos i see how they could off the risk to investors but there must be a recourse clause in there somewhere. you are right they will be bailed out if the problem is tbtf.

Froman's picture

Factor this news in with the news that banks are providing 60 to 84 month financing on used Hyundais to borrowers with credit scores <600 and it should make for an interesting next few years in the car market. 

GunnerySgtHartman's picture

I am looking forward to a crash in used-car prices:

1.  Savings on vehicle property taxes; the property taxes are based on current resale values.  I got my clock cleaned on taxes when Cash for Clunkers drove the price of used cars into orbit.

2.  The opportunity to pick up a high-end European luxury car on the cheap (would love to have a Bentley).

It will be interesting to see how much time passes before some idiot in DC starts calling for "Cash for Clunkers 2" to bolster used-car prices (and hence state & local tax revenues).

Ace Ventura's picture

Cash for Clunkers 2.0 is baked into the cake, just waiting for the temperature to reach ideal baking parameters. I will be far more surprised if there ISN'T another bailout along those lines.

And yes, in commie-lite states like VA we will once again get porked by infernal 'property taxes' as our 'assessed values' get artificially juiced.

Like I said, I just don't see how they DON'T do this again.

FlameSky's picture

According to NADA and JDPowers, leases make up ~30% of new car light vehicle transactions. (Q1 2017)

Arnold's picture

The wore ass out, self driving Uber taxi vehicles will be a further axe to the head.
You've somehow got to get the Millennial to love the car again.

JRobby's picture

Not going to happen

Study them a bit more.