Auto Industry Faces Squeeze From Fed Lending Program

By LIZ RAPPAPORT The government's $200 billion program to revive the market for securities backed by consumer loans may end up providing little help to the very industry that needs it most: U.S. auto makers. As the Federal Reserve hashes out final terms of its Term Asset-Backed Securities Loan Facility, or TALF, it is becoming clear that securities that help finance auto dealers mightn't meet some criteria. That would block a form of funding that auto companies had hoped would provide immediate relief as they fight for survival. The problem came to a head because of credit ratings. The Fed has insisted that any deal it helps finance be given a triple-A rating from Moody's Investors Service, Standard & Poor's or Fitch Ratings. Bankers said this kicks out deals backed by loans to auto dealers because S&P and Moody's, in particular, have cut the ratings on such securities over the past several weeks as the industry grapples with potential bankruptcy filings and weaker demand for U.S. cars. The auto companies and their finance arms were expected to be among the biggest beneficiaries of the TALF. They needed the money so dealers could get financing to buy cars from manufacturers. Investors have shunned these deals, and banks are trying to get out of commitments for these loans. The government aid comes at a crucial time because car makers will need to refinance more than $15 billion in loans to dealers, including $6 billion that comes due next month, said people familiar with the situation. Through the program, the Fed would make loans to investors to purchase securities backed by their loans, allowing investors to achieve double-digit-percentage returns in some scenarios. This type of financing for dealers has been essential to auto manufacturers' attempts to keep cars rolling off assembly lines. If dealers can't borrow money to buy cars to fill their lots, "you're out of business," said Charles Oglesby, chief executive of Asbury Dealer Group, of Duluth, Ga., which operates 87 retail auto stores. "It backs up the whole process of selling cars." Cheaper loans for dealers also mean cheaper deals for consumers, he said, adding he gets financing from a consortium of lenders and isn't concerned about his own dealers' ability to borrow. The TALF has been saddled with complications from the start as the government tries to balance protecting taxpayers from losses with efforts to restart the economy. Fed Chairman Ben Bernanke said Wednesday that the program will launch soon, but questions about the terms of the Fed's loans, its overreliance on credit ratings, and the back-office procedures for distributing investors' money are rankling potential participants. While the Obama administration has said it expects to expand the TALF to as much as $1 trillion to include residential and commercial mortgage-backed securities, investors are beginning to question whether the program will get off the ground in time to have an impact. The asset-backed debt markets, which provided at least 50% of the Big Three's financing needs, have been virtually stalled since Lehman Brothers Holdings Inc.'s bankruptcy filing in September, and deals to fund loans to auto dealers haven't been done in the market since 2007. Ford Motor Credit and GMAC LLC had plans under way for offerings of TALF-eligible debt that would have financed dealers, said people familiar with the matter. Preparations were halted once it became clear that the deals mightn't qualify. A Ford Motor Credit representative declined to comment beyond saying the company still is awaiting final details on the program. GMAC said it is in discussions with the Federal Reserve about the program. Ford Motor Credit and GMAC have at least $3 billion each of such debt due in March, said the people familiar with the matter. Chrysler LLC's finance arm has $6 billion coming up for renewal in August. Mike Jackson, the chief executive of auto retailer AutoNation Inc., has heralded the program as the auto industry's best hope for pulling out of "depression-level" sales. But he acknowledges there needs to be some solution for lenders to get financing for loans to dealers or the whole system falls apart. "It's integral to the system," Mr. Jackson said. Write to Liz Rappaport at liz.rappaport@wsj.com