BREAKINGVIEWS-Credit blowout drives US auto market off course

By Sebastian Pellejero

NEW YORK, Sept 29 (Reuters Breakingviews) - The gears of the American car economy are grinding. While consumer demand for vehicles remains firm, especially in regions where driving is non-negotiable, the financial machinery that powered the post-pandemic boom is seizing up. A string of bankruptcies and earnings disappointments suggests it's not consumer appetite that's faltering, but the scaffolding of cheap credit that greased the wheels of car ownership in the U.S.

Auto credit swelled in the pandemic's slipstream. Outstanding auto loan balances now total $1.7 trillion, up 25% since 2019, making it the second-largest category of consumer debt after mortgages, according to credit bureau Equifax and the New York Federal Reserve. The average loan term stretches 68 months. Sales of bonds backed by bundled auto loans reached $126 billion last year, a new record supported by 12% growth in loans to borrowers with lower credit scores, according to S&P Global.

Now the bills are coming due. Used car loan rates average 11%, according to Edmunds, and monthly payments for borrowers are over 30% higher since 2020. More than 5% of borrowers are behind on repayments, says Lending Tree. The pressure has already pushed some players over the edge. This month, subprime lender Tricolor and car parts supplier First Brands filed for bankruptcy within weeks of each other. Both relied on easy access to funding, whether through securitized debt or supplier financing, to stay afloat.

Even mainstream players are now feeling the strain. CarMax KMX.N, the country's largest used car seller, missed earnings expectations as unit volumes and per-car profits fell, sending shares down 22% since September 24. That's most concerning for the middle of the market. Cars priced between $20,000 and $40,000, which make up half of all used vehicle sales, rely on financing 80% of the time, Lending Tree reckons.

Some industry corners are still cruising. Ferrari's order book is full until 2027, and cars priced under $15,000 remain hard to find, according to Kelley Blue Book. But for most buyers, demand depends on cheap credit. With the price of a new ride averaging around $48,000, or six times the median savings balance in the U.S., that's a growing stretch.

The cracks are most evident where credit did the heavy lifting. With defaults rising and loan costs still elevated, borrowers and the businesses built around them face a rougher road ahead.

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CONTEXT NEWS

Auto-parts supplier First Brands filed for Chapter 11 bankruptcy protection on September 29, after racing to restructure the company's $6 billion of syndicated debt as investor confidence eroded because of additional financing facilities tied to customers and suppliers.

CarMax, the nation's largest used car seller, said on September 25 that sales and profit plunged during its latest fiscal quarter. The Virginia-based retailer sold about 200,000 units from June to August, a 5.4% decline from a year earlier. Its net profit fell to 64 cents per share from 85 cents.