With the auto loan securitization machine humming right along (pace of new issuance is up 30% compared to this time last year at nearly $24 billion YTD) and with the attendant $1 trillion pile of auto loan debt growing by the day as lenders scramble to turn ineligible borrowers into eligible borrowers by extending loan terms and ignoring small details like whether or not the buyer is employed, just about everyone is looking to get a piece of the pie including Warren Buffett’s Berkshire Hathaway.
Via WSJ [8]:
Billionaire Warren Buffett has closed a deal to buy the nation’s largest privately-held dealership chain, renaming it Berkshire Hathaway Automotive and paving the way for a major new player in the car-retailing business.
Berkshire Hathaway Inc. announced in October it would buy the Van Tuyl Group, America’s fifth-largest retailer with 81 stores in 10 states, and use it as a launch point to acquire more dealerships. The deal was targeted to close at the end of the first quarter this year.
Van Tuyl Group, a closely held business that was founded in Kansas City nearly 60 years ago, had previously sold about 240,000 cars a year through its dealerships.
The move comes as the car-retailing sector undergoes significant changes. With U.S. auto sales booming, smaller, family-run dealerships are getting snapped up by larger chains looking to provide better efficiencies.
Yes, “better efficiencies” which, if the underwriting practices that prevailed just before the housing bubble collapsed are any guide, likely means figuring out how to make more loans, faster because when an unprecedented global yield hunt leads to new auto ABS deals being upsized by 35% (as one Santander Consumer offering was in January), “inefficiency” (read: prudence) simply isn’t something that can be tolerated.
As Fortune noted when the deal was first announced last October, Buffett will be competing with the likes of AutoNation, whose CEO Mike Jackson recently suggested on live television that worries about subprime auto were likely exaggerated. In any event, Berkshire appears to be entering the market at a rather precarious time for as we have noted on a number of occasions (and as Goldman recently confirmed [9]), growth in US auto sales is (or, after February’s data, “was”) entirely dependent on loans to subprime borrowers, a trend which, thanks to rising delinquencies and government scrutiny, is about to come to a screeching halt:
We were shocked — shocked — when February auto sales turned out to be a BNSF-style trainwreck (even AutoNation CEO Mike Jackson’s “trucks, trucks, trucks” couldn’t save the day as Ford F-Series sales fell 1.2%). Of course to let the media tell it, February’s disastrous numbers were due to weather (snow in the winter) but we had our doubts and so were not surprised when a new note from Goldman confirmed, by way of an avalanche of data and charts, precisely what we’ve been saying all along which is that the risks inherent in subprime lending are materializing and that at the margin, growth has all been created by lowering credit standards and extending terms to a whole load of 'new' auto buyers...
In the end, Goldman comes to exactly the same conclusion as we did months ago, namely that despite the financial media’s parroting about snow in the winter, the simple fact is that as soaring delinquencies and government probes conspire to cut the least-creditworthy Americans off from debt servitude, bad things will happen in US car sales.
For his part, Buffett says he understands that the business is cyclical, but notes this really isn’t an issue because Berkshire’s investment horizon is, well, forever:
“This is the beginning of a journey that will have no end.”
The only question now is how many retail investors will take this as an opportunity to execute CNBC’s car-stock arbitrage [10] by taking out a 7-year car loan from Berkshire Hathaway Automotive in order to finance the purchase of a few Berkshire Hathaway B shares from their Etrade account.
