In the latest installment of the annual Best of BHPH issue of BHPH Report, we go behind the scenes with some of the leading companies in the used-car space and their top executives with a few Q&A features.
Next up in this series is Russ Algood, chief executive officer of Ace Motor Acceptance Corp.
BHPH Report: How eager or hesitant had dealers been to sell off their paper in 2016 and why?
Russ Algood: Overall, I would say they’ve become a little less eager to sell paper off to where they no longer participate in it. Over the past couple of years leading up to this one, we’ve seen the bulk purchasers get pretty aggressive on their pricing. It seemed like this year they’ve modified that back some. Still pretty good pricing but not as strong as it was.
Dealers are still more willing to sell paper when they need to raise capital. For a little while there, you were seeing some dealers sell paper because they were getting paid so much for it and it just made sense to sell it rather than keep it.
We’ve also seen this year a lot more dealers reaching out to us to satisfy their capital needs.
BHPH Report: How prudent and wise have operators been with their lines of credit and floor plan in 2016?
Russ Algood: I can really only speak to our dealers, but our dealers have been very successful this year. They’ve had good years. They’re operating within their lines, meeting their requirements generally speaking.
Overall, I’d have to give them a good rating for how they’re handling it. One thing is a lot of times when dealers first get availability for extra capital, they do have a tendency to maybe want to loosen their underwriting standards and put more on the books. They have to be careful not to do that. Or as they grow and they get more accounts that they’re servicing, they need to be sure they have the collections staff necessary to work the collections on a larger portfolio.
There are also some dealers who want to get financing on their portfolio because they want to open a second lot or add four bays on their service department, things like that.
BHPH Report: How will the new accounting standard for reserving for credit losses impact how working capital can be obtained?
Russ Algood: The standards don’t go into effect for several years yet, so it’s a little hard to say how banks will react. With the new standards, dealers will have to set up more reserves than they do now, which will have an effect on decreasing earnings or decreasing equity or both. They may just set up a one-time charge to kick their reserve up, which really hits equity. Or if they gradually do it, it’s going to impact earnings over time.
A lot of lenders have debt ratios where they’ll only loan you three times the equity you have. Overall, it’s going to lead to a tightening of the credit market. To some extent, it’s a little hard to say how some lenders will react. In our case, the way we underwrite for our BHPH in a Box program, it will have no effect at all.
BHPH Report: What industry trends are you planning to watch closely in the New Year?
Russ Algood: There’s a couple of things we’ve been seeing that we think will actually lead to an increase in the buy-here, pay-here business. One is several of the subprime lenders have either exited the market altogether or they’ve discontinued doing business with independent dealers, things like that, which is leading toward less availability for just straight subprime.
We’ve also seen over the past year or so, our buy-here, pay-here delinquencies have been going down. To the extent that delinquencies and losses in subprime continue ticking up nationwide will push more customers to the buy-here, pay-here dealers.
We look at this as something that will lead to an increase in the buy-here, pay-here business.
Additional pieces from this series can be found below:
4 questions with Ace Christian of the Arizona Independent Automotive Dealers Association
4 questions with Bill Caan, national sales manager at CalAmp
4 questions with NCM Associates’ Brent Carmichael
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