July 19, 2018 / 7:20 PM / a year ago

Auto loans weaken in US secondary market amid tariff threats

NEW YORK, July 19 (LPC) - Secondary loan prices for US automotive manufacturers and components makers are falling as investors view proposed US tariffs of up to 25% on imported automobiles and parts as negative for the sector.

The Trump administration heard pleas from leaders representing the domestic auto industry in US Commerce Department hearings in Washington on Thursday, who said that duties would hurt competitiveness, drive up prices on cars and trucks and trigger major job losses. The public hearings examined whether the import of vehicles represents national security risks.

Average bids for auto loans were 98.64% of face value on July 18, 151bp lower than 100.15 on February 1, which was the highest point in the year. The start of the trade tariff talks dragged levels to 99.8 in early March, according to Thomson Reuters LPC data.

“The softness is likely due to a multitude of factors including slowing auto sales growth, pricing pressure, weakening profit margins, which get compounded by the ongoing uncertainty around trade wars,” said Nishit Madlani, director and ratings analyst of autos at Standard & Poor’s.

Auto loans are weakening, along with the overall US secondary loan market, which posted a lackluster second-quarter return of just 0.7%, the worst quarterly performance since the fourth quarter of 2015, according to industry body the Loan Syndications and Trading Association (LSTA).

Auto components supplier Cooper Standard Automotive’s US$337m term loan fell to 99.75-100.375 on Wednesday from a 100.75-101 level in May. Automotive supplies producer American Axle & Manufacturing also failed to attract investors to refinance a US$1.5bn loan and ultimately shelved the transaction in late May.

American Axle did not respond to calls seeking comments.


Major credit ratings agencies have also sounded the alarm about the auto sector. Moody’s Investors Service said the tariff would be negative for most every auto group including carmakers, parts suppliers, dealers and transportation companies. Sales and margins for nearly all automakers will likely be squeezed, according to S&P, and Fitch Ratings estimated the aggregate impact of tariffs could approximate US$47bn annually.

In May, President Trump ordered the “Section 232” national security probe into imports of autos and said in late June that the investigation would wrap up in three to four weeks, Reuters reported. Similar national security probes have led to import tariffs on steel and aluminum.

“Ongoing discussions add significant uncertainty because so many negative outcomes are possible,” Madlani said. “Tariffs will be harder to elude because of the complex globally integrated automotive supply chains. Should the trade wars escalate, indirect effects could lead to a GDP growth dip easily below our 1.8% estimate for longer-trend growth.”

The magnitude of the tariff impact will come down to the countries it applies to, particularly whether Mexico and Canada would be targeted, according to Tim Harrod, lead auto parts analyst at Moody’s.

“It could be a very significant impact,” he said. “The impact will largely come from if the tariff is applied to auto parts from Mexico and Canada. Many of the parts suppliers have locations in Mexico and Canada.”

Numerous automakers have built assembly plants in Mexico to service the US market, according to Moody’s. In 2017, Mexico produced 3.8 million vehicles, 82% of which were exported and 84% of those imported went to the North American market. (Reporting by Yun Li Editing by Tessa Walsh and Michelle Sierra)

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