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Car Dealership Financing Guarantee Appropriation Bill 2009



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Parliament of Australia Department of Parliamentary Services

Parliamentary Library Information, analysis and advice for the Parliament BILLS DIGEST

www.aph.gov.au/library

22 May 2009, no. 137, 2008-09, ISSN 1328-8091

Car Dealership Financing Guarantee Appropriation Bill 2009

Michael Priestley Economics Section

Contents

Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Financial implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Main provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Concluding comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2 Car Dealership Financing Guarantee Appropriation Bill 2009

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Car Dealership Financing Guarantee Appropriation Bill 2009

Date introduced: 14 May 2009

House: House of Representatives

Portfolio: Treasury

Commencement: The day of Royal Assent

Links: The relevant links to the Bill, Explanatory Memorandum and second reading speech can be accessed via BillsNet, which is at http://www.aph.gov.au/bills/. When Bills have been passed they can be found at ComLaw, which is at http://www.comlaw.gov.au/.

Purpose

The Bill provides for a standing appropriation to enable claims to be paid under the Deed of Guarantee in respect of the Australian Government Guarantee to support interim funding to car dealerships, executed on behalf of the Commonwealth on 23 December 2008.

Background

On 5 December 2008, the Treasurer announced the establishment of a Special Purpose Vehicle (SPV), with the support of leading Australian banks, to provide liquidity to eligible car dealers who were left without financing as a result of the departure of two large automotive finance leasing companies from the Australian market following the onset of the global financial crisis.1

The two companies are GE Money Motor Solutions, a subsidiary of GE Money, a division of GE Capital, one of four main businesses of General Electric (GE) and GMAC Australia LLC, GMAC’s automotive and motorcycle finance business in Australia - GMAC is the automotive finance business of General Motors Corp. It is estimated that one quarter of new car dealerships obtained wholesale floorplan finance though GE Money Motor Solutions and GMAC Australia LLC.2

1. Wayne Swan MP (Treasurer), Car Dealer Financing: Establishment of a Special Purpose Vehicle, Media Release, 5 December 2008, viewed 21 May 2009, http://www.treasurer.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/136.htm&pageID=0 03&min=wms&Year=2008&DocType=0

2 ‘Too few lenders will drive dealers out of business’, The Cairns Post, 19 November 2008.

Car Dealership Financing Guarantee Appropriation Bill 2009 3

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

The SPV, otherwise known as ‘Ozcar’, was established as a Trust on 2 January 2009. Under the agreements negotiated with the leading Australian banks - the Commonwealth Bank of Australia, the ANZ, the National Australia Bank and Westpac - the four major banks will provide liquidity to Ozcar through the purchase of ‘AAA’ rated Ozcar securities. Most of these securities will require a Commonwealth Guarantee so that they qualify as ‘AAA’ in order for the four major banks to purchase the securities. Having raised funds through the sale of securities to the banks, Ozcar will make available funding for 12 months to eligible car dealerships requiring finance.

In his Second Reading Speech for the Bill, the Assistant Treasurer told the House that most of the former GE and GMAC dealerships had managed to secure alternative financing, primarily through the remaining lenders. As a result of the orderly wind down of GE and GMAC loans books and alternative sources of finance, the initial estimate of $2 billion to finance future loans was reduced to $850 million. The Assistant Treasurer stated that the final figure will be much less and the appropriation to support the Commonwealth Guarantee will apply to around $550 million of the securities issued by the Ozcar SPV.3

New vehicle sales

New vehicle sales figures for April 2009, released on 5 May 2009 by the Federal Chamber of Automotive Industries, show that 63,965 passenger motor vehicles, SUVs and commercial were sold in April 2009, a fall of 23.9 per cent compared with the same month in 2008 (see Table 1: Sales Volumes).

Year-to-date, a total of 276,935 new vehicles have been sold, a fall of 20.3 per cent compared with the same period last year, suggesting annual sales of 840,000 for 2009, compared with 1,012,164 in 2008.

The fall in new car sales reflects the broader slowdown in the Australian economy and globally, with the four local motor vehicle manufacturers reducing production in response to falling demand (see Table 2: Australian Automotive Industry - Monthly Production Volumes). Production levels are the lowest since the 2001 downturn and have led to temporary stand downs and a four-day week for automotive component manufacturers. Most affected by falling demand has been the sale of Toyota’s Camry and Aurion which have fallen 36 per cent.4

The new vehicle sales for April show a 40 per cent fall in demand for large luxury cars. Sales of light and small cars fell 16 and 27.2 per cent respectively.

3 C Bowen MP (Assistant Treasurer), ‘Second reading speech: Car Dealership Financing Guarantee Bill 2009’, House of Representatives, Debates, 14 May 2009, pp. 4-5.

4 ‘Vehicle sales look bleak’, The Australian, 3 April 2009.

4 Car Dealership Financing Guarantee Appropriation Bill 2009

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Table 1: Sales Volumes

Month YTD Variance +/- Vol. & %

2009 2008 2009 2008 MTH YTD MTH YTD

Passenger 36,697 47,626 163,953 202,989 -10,929 -39,036 -22.9 -19.2

SUV 13,092 16,667 55,248 71,098 -3,575 -15,850 -21.4 -22.3

Light Commercial 12,040 16,690 50,053 62,263 -4,650 -12,210 -27.9 -19.6

Heavy Commercial 2,136 3,078 7,681 11,164 -942 -3,483 -30.6 -31.2

Total Market 63,965 84,061 276,935 347,514 -20,096 -70,579 -23.9 -20.3

Light 8,446 10,050 38,188 44,573 -1,604 -6,385 -16.0 -14.3

Small 13,532 18,589 65,349 79,692 -5,057 -14,343 -27.2 -18.0

Medium 5,365 7,360 22,906 29,740 -1,995 -6,834 -27.1 -23.0

Large 7,048 8,689 28,432 36,577 -1,641 -8,145 -18.9 -22.3

Upper Large 271 453 1,125 2,082 -182 -957 -40.2 -46.0

People Movers 765 1,147 3,035 4,349 -382 -1,314 -33.3 -30.2

Sports 1,270 1,338 4,918 5,976 -68 -1,058 -5.1 -17.7

SUV Compact 6,080 6,472 25,294 30,031 -392 -4,737 -6.1 -15.8

SUV Medium 4,869 6,701 20,981 28,028 -1,832 -7,047 -27.3 -25.1

SUV Large 753 1,662 3,188 5,985 -909 -2,797 -54.7 -46.7

SUV Luxury 1,390 1,832 5,785 7,054 -442 -1,269 -24.1 -18.0

Light Buses 164 372 712 1,139 -208 -427 -55.9 -37.5

Vans 1,529 2,292 6,145 8,405 -763 -2,260 -33.3 -26.9

PU/CC 4X2 4,581 6,397 18,928 24,834 -1,816 -5,906 -28.4 -23.8

PU/CC 4X4 5,698 7,550 24,039 27,468 -1,852 -3,429 -24.5 -12.5

Trucks 2.5-3.5 GVM 68 79 229 417 -11 -188 -13.9 -45.1

Heavy Commercial 2,136 3,078 7,681 11,164 -942 -3,483 -30.6 -31.2

Total Market 63,965 84,061 276,935 347,514 -20,096 -70,579 -23.9 -20.3

Source: VFACTS Sales Report for April 2009: Federal Chamber of Automotive Industries.

Table 2: Australian Automotive Industry - Monthly Production Volumes

2009 2008 2007 2006 2005 2004 2003 2002

January 11,937 21,152 18,666 14,044 14,677 20,423 21,211 19,315

February 20,404 32,303 29,376 28,276 32,975 34,798 35,769 27,891

March 21,310 26,393 29,433 30,802 34,626 38,824 37,440 29,119

April 12,792 28,721 22,633 25,870 33,616 30,233 29,158 22,043

May 35,180 33,274 33,630 38,845 36,971 36,364 31,251

June 29,884 29,195 23,568 37,663 39,164 34,788 28,979

July 33,121 31,813 22,643 32,146 25,842 36,641 27,482

August 29,397 27,713 34,224 36,318 37,098 33,973 27,903

September 28,511 28,563 28,944 36,514 37,333 37,188 28,894

October 24,119 33,320 33,020 36,462 37,130 39,571 34,695

November 20,659 29,746 31,536 33,167 39,306 34,237 33,466

December 14,678 21,040 20,403 21,976 28,192 31,846 29,436

Total 66,443 324,118 334,772 326,960 388,985 405,314 408,186 340,474

Source: Federal Chamber of Automotive Industries.

Car Dealership Financing Guarantee Appropriation Bill 2009 5

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Financial implications

According to the Explanatory Memorandum to the Bill, the overall contingent liability for the Commonwealth is around $550 million, comprising 45 per cent of the remaining GE Money and GMAC loan books and 85 per cent of the Ford Credit loan book.

To limit the risk to taxpayer’s funds, the SPV will only be available to advance funds if it is satisfied that the dealership is not subject to any insolvency event. In the event that the Deed of Guarantee is called upon, any payment made under it will reduce the underlying cash balance. The Explanatory Memorandum states that:

The extent of the impact on the underlying cash balance will depend on borrowers’ default and borrowers’ ability to meet any SPV’s claims. Under the Series Notice, the Trustee indemnifies the Commonwealth (out of the assets of the Trust) against any amounts paid or required to be paid by the Commonwealth under the Guarantee.

Main provisions

Item 3 Definitions

Deed of Guarantee is defined thus:

Deed of Guarantee means the Deed of Guarantee in respect of the Australian Government Guarantee to Support Interim Funding to Car Dealerships, executed on behalf of the Commonwealth on 23 December 2008, as that Deed is in force from time to time.

Item 5 Appropriation

The Consolidated Revenue Fund is appropriated for the purposes of paying claims under the Deed of Guarantee.

Concluding comments

No securities have as yet been issued under the Ozcar SPV. However, as the guarantee covers most of the Ford car dealerships and as new loans are taken out in the new financial year, the SPV will underpin the next 12 months trading by dealerships. Looking over the previous seven months, the showroom decline has averaged 17 per cent per month, despite advertised reductions on 2008-stock models. However, with assistance from the

6 Car Dealership Financing Guarantee Appropriation Bill 2009

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Government’s investment allowance and additional tax break for small business, new car sales are forecast to recover.5

5 ‘Bad news for Holden as car sales plunge by 24pc’, The Advertiser, 6 May 2009.

Car Dealership Financing Guarantee Appropriation Bill 2009 7

Warning:

This Digest was prepared for debate. It reflects the legislation as introduced and does not canvass subsequent amendments.

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

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