Toyota’s Securitization of Car Loans Will Free Up Cash For More Loans In China

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Japanese car manufacturer and distributor, Toyota Motor Corp (NYSE:TM), has initiated a plan to securitize car loans in China to free up funds to support the growing demand from the world’s largest auto market. The company auctioned $800 million yuan($128 million US dollars) worth of asset-backed securities on Friday, May 23rd. The U.S. based automaker Ford also issued $800 million worth of asset-backed securities a day earlier, while German companies Volkswagen and BMW are also expected to offer structured products of similar sizes in the near future. [1]

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Raising money through the issuance of securitized car loan-backed securities offers two advantages to Toyota:

1) By pooling together car loans and offloading them to a Special Purpose Entity(SPE), the company takes debt off its balance sheet, thereby reducing its overall risk.

2) The company will make money off the differential between the interest rate charged on car loans and the interest rates required by the holders of these securities. It can then use this cash to service more car loans.

Additionally, the growth in auto financing in China  is expected to exceed the growth rate in the passenger-vehicle market. Roland Berger Strategy Consultants projected  the number of car loans to increase by 25% between 2013 and 2017, and forecast the penetration rate of passenger-vehicle financing to grow to 30% from 17% over the same period. [1] With this move, Toyota can establish itself early in this still nascent market, which could give it a first mover advantage.

China Passenger Car Market To Grow Rapidly

Toyota has recovered from the slump Japanese automakers experienced in China in 2011, following a spate of anti-Japan protests related to a dispute over an island in the South China Sea. Despite the recovery, Toyota remains only the 6th biggest seller of cars in China, behind Volkswagen, General Motors, Hyundai, Nissan and Ford. [2]Following a 20% rise in car sales, compared to the previous year, in the January-April period, the growth rate of sales has slowed to just 2.7% in May. This leaves the company in danger of missing out on its stated target of growing sales in China by 22% to 1.1 million cars in 2014. [3]

According to KPMG, China will be responsible for nearly one-third(~35 million) of the annual new passenger car sales by 2020. [4] Given the high growth potential in this market, it is an extremely important market for all automakers. Moreover, the appeal of cars made by domestic companies has been declining. According to China Association of Automobile Manufacturers, the share of Chinese car brands in the passenger-vehicle segment, including minivans, fell to less than 39% in the first quarter of 2014 from 43% a year ago. By offering alternative means of financing to young consumers, foreign car companies can help tip the share-balance even further in their direction. [1]

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Notes:
  1. Toyota, Ford Plan To Securitize Car Loans In China, Wall Street Journal, May 2014 [] [] []
  2. Ford China Deliveries Surge 49% in 2013, Overtaking Toyota, Bloomberg, January 2014 []
  3. Toyota, Nissan Post Slower China Sales Growth, Wall Street Journal, June 2014 []
  4. Global Automotive Retail Market, KPMG[PDF] []