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Car Dealership Financing Guarantee Appropriation Bill 2009

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2008-2009

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

CAR DEALERSHIP FINANCING GUARANTEE APPROPRIATION bill 2009

 

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 

(Circulated by the authority of the

Treasurer, the Hon Wayne Swan MP)



T able of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1            Car Dealership Special Purpose Vehicle........................ 9

 

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The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

SPV

The special purpose vehicle established to raise funds and advance finance to car dealership financiers.  The special purpose vehicle is the Ozcar ABS Trust 2009-1 created pursuant to clause 3.2 of the Master Trust Deed dated 31 December 2008.

Deed of Guarantee

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, which is published on www.treasury.gov.au.

ACSA

Acquisition, Custodian and Servicing Agreement, the main operating agreement governing the arrangements for the provision of financing by the SPV to each eligible car dealer financier.  A separate agreement is entered into with each eligible car dealership financier.



Temporary financing facility for car dealerships

Global credit conditions are likely to remain tight in 2009 as a result of the global financial crisis.  The announcement by GE Money Motor Solutions and GMAC in late 2008 that they would be exiting the Australian market, had a major impact on the overall availability of wholesale floorplan finance for Australian car dealers.

Although there has been some recent stabilisation in the market, a number of viable car dealerships will need assistance in securing access to floorplan financing if they are to remain in business over the next 12 months.

Any forced closure of otherwise viable car dealerships will have a direct adverse impact on the Australian automotive industry, including component suppliers, at a time of significant economic challenge.

The Australian automotive industry plays a critical role in the Australian economy.  It employs 66,000 Australians and is a major investor in R&D and its activities drive demand across the economy.  Car dealerships play an important role in the economies of regional centres.

In response to the announced exit of two of the largest providers of wholesale floorplan finance in Australia, GE Money Motor Solutions and GMAC, the Government has facilitated the establishment of a private sector special purpose vehicle (SPV) involving the four major banks and various car dealership financiers to provide liquidity support to the automotive dealer industry with Credit Suisse as Programme Manager.

The Subscription agreement negotiated with the funding banks (Commonwealth Bank of Australia, Australia and New Zealand Banking Group Ltd, National Australia Bank Ltd and Westpac Banking Corporation) involves the four banks providing the loan funds to the SPV through the banks subscribing for ‘AAA’ rated securities (notes) issued by the SPV Trustee.

While the Government will not be providing direct funding to support the SPV, it will support the SPV by providing a Commonwealth Guarantee on those securities issued by the SPV that are risk rated below ‘AAA’ by the appointed ratings agency, Standard & Poors.  The provision of a Guarantee in this form will ensure that all securities issued by the SPV will be ‘AAA’ rated.

How the trust arrangements work

The SPV is established as a financing trust.  The legal and contractual arrangements impose obligations on eligible car dealership financiers seeking financial accommodation through the SPV that are usual in auto dealer floorplan commercial lending transactions. 

The primary transaction documents comprise:

(a)    The Master Trust Deed and Notices of Creation of Trust;

(b)    Government Guarantee;

(c)    Subscription Agreement;

(d)    Series Notice;

(e)    Acquisition, Custodian and Servicing Agreements;

(f)    Master Servicing Agreement; and

(g)    Security Trust Deed.

These documents can be inspected on the Treasury web site at www.treasury.gov.au.

The Master Trust Deed sets out the terms on which a series of trusts may be established, including the primary trust for the SPV, the Ozcar ABS Trust 2009-1 (the Trust).  Under the Master Trust Deed Perpetual Corporate Trust Limited agrees to act as Trustee, Credit Suisse (Australia) Limited agrees to act as Programme Manager and Perpetual Nominees Limited agrees to act as Trust Administrator for the Trust and each other trust established under that document.  The Commonwealth is not a beneficiary of any of the trusts which are established under the Master Trust Deed, however its position as guarantor is specifically recognised in the trust documentation.

The Master Trust Deed sets out the basic duties and powers of the Trustee, the Programme Manager and the Trust Administrator.  It also sets out procedural matters relating to the raising of funds by the Trust, the Notes issued by the Trustee and the administration and auditing of the Trust and its activities.

Pursuant to a separate agreement between the Commonwealth and Credit Suisse, the Commonwealth exercises governance control over the exercise by Credit Suisse of its powers and discretions as Programme Manager under the various transaction documents.

The Subscription Agreement sets out the terms on which the Note Subscribers (the four major banks) will subscribe for Notes (debt instruments) issued by the Trustee.  It sets out the maximum amount (or aggregate subscription limit) of Notes that can in total be subscribed for; the maximum amount each Note Subscriber (Bank) will subscribe for in different classes (some covered by the Guarantee and some rated ‘AAA’ by the Rating Agency which are not covered by the Guarantee) and the conditions that must be satisfied before that funding can occur.

Limits are placed on the ability of the Banks to transfer (or on sell) these Notes.  Under the Series Notice, Notes can only be transferred to an ‘Approved Transferee’ being either the Reserve Bank; a body corporate who is an authorised deposit taking institution within the meaning of the Banking Act 1959 (Cth); a body corporate who is a foreign ADI within the meaning of the Banking Act 1959 (Cth); or any other person the Commonwealth approves as a transferee.

The Acquisition, Custodian and Servicing Agreement (ACSA) is the main operating agreement between the Trust and each eligible car dealership financier.  There is a separate ACSA for each eligible car dealership financier.  Under the ACSA, the eligible car dealership financier is appointed as an ‘Approved Seller’ and ‘Servicer’ of the Trust, responsible for originating, underwriting, selling to the Trust and servicing eligible dealers funded via the Trust. 

Each ACSA sets out:

•        the eligibility criteria for dealers and the types of assets eligible to be funded via the Trust;

•        the mechanics for the funding of eligible car dealership financiers by the Trust (by way of the acquisition of vehicles and receivables of the eligible dealers and the sale back to the eligible financier) and the conditions to that funding;

•        the cash-flows between the Trust and the eligible car dealership financier (the revolving funding balance as vehicles and receivables are sold in and out of the Trust, the application of collections received from eligible dealers that are funded via the Trust and the funding charges payable to the Trust);

•        the ‘trust-back’ of the securities that support both the agreements and other funding provided independently by the eligible car dealership financier to the dealer to enable the Trustee and the eligible car dealership financier to both benefit from those securities;

•        the servicing of the eligible dealers by the eligible car dealership financiers;

•        the audits that the Trust is entitled to conduct to ensure that the eligible financier is complying with certain of its material obligations to the Trust (such as checking that only eligible dealers are being funded via the Trust and the eligible financier is continuing to service the eligible dealers in accordance with the same standard that they did when they sign the ACSA);

•        what happens if an eligible car dealership financier defaults in its obligations to the Trust under the ACSA; and

•        representations, warranties and undertakings given by the eligible car dealership financier in favour of the Trust (for example, about the eligible dealers, the vehicles and receivables that are being funded via the Trust and how the eligible car dealership financier is to originate, underwrite, service and collect from those dealers).

Date of effect :  The provisions of the Bill will take effect on the commencement of the legislation.

Proposal announced :  The proposal was announced by the Treasurer on 5 December 2008 in a Media Release, ‘Car Dealer Financing: Establishment of a Special Purpose Vehicle’.  An Information Guide about the operation of the SPV was announced by the Treasurer on 19 December 2008 in a Media Release, ‘Treasurer releases update on Car Dealer Financing and the Special Purpose Vehicle’.

The SPV has been established as a financing trust.  It will be available to advance loans to new financiers until 30 June 2010.  It will provide a facility for wholesale floorplan financing.  It will not be available for retail financing.  The Deed of Guarantee will guarantee notes issued by the Trustee during that period.  As notes issued by the Trustee will have a 3-year maturity, the Guarantee will continue to apply to the eligible notes until they mature or are retired.  No notes have to date been issued.

The major Australian banks support the establishment and ongoing operation of a facility for refinancing car dealerships.  The continued support and co-operation of these financial institutions is critical to the effective implementation and operation of the SPV arrangement. 

The Bill will be limited to guaranteeing securities that the OzCar Trust facility issues which are risk rated below ‘AAA’ by Standard & Poors.  It appropriates funds 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.

Financial impact:

The Bill provides an appropriation for the purpose of paying any claims pursuant to the Deed of Guarantee.  The appropriation is not subject to a specific monetary limit. 

The overall contingent liability for the Australian Government is estimated to be around $550 million comprising around 45 percent of the remaining GE and GMAC loan books and 85 per cent of the Ford Credit loan book.

Under the Dealer Eligibility Criteria the SPV will only be able to advance funds if it is satisfied that the dealership is not subject to any insolvency event.  The terms of any loans must be consistent with the usual commercial lending criteria of recognised finance providers.  These requirements will limit the risk to taxpayer’s funds. 

In the event that the Guarantee is called upon, any payment made under it will reduce the underlying cash balance.  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.

An explicit guarantee fee will not be charged to the Noteholders.  This is because such a fee will add to the flow on cost to consumers and add to the overall pricing pressure in the SPV increasing the likelihood of a call on the guarantee being made.  However, in its pricing the program manager will build a credit loss reserve within the SPV which will reduce the likelihood of the guarantee being called upon.

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C hapter 1     

Car Dealership Special Purpose Vehicle: Ozcar ABS Trust 2009-1

Outline of chapter

1.1                   The Bill makes an appropriation for the Government’s Guarantee of those securities issued by the SPV that are risk rated below ‘AAA’ by the appointed ratings agency, Standard & Poors.

Context of amendments

1.2                   On 5 December 2008, the Treasurer announced that a Special Purpose Vehicle would be established with the support of leading Australian banks to provide liquidity to car dealer financiers who have encountered financing difficulties as a result of the global financial crisis. 

Summary of new law

1.3                   The Bill provides for an 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.

Detailed explanation of new law

Appropriation

1.4                   The Consolidated Revenue Fund is appropriated for the purpose of paying claims under the Deed of Guarantee [Clause 5]

Other provisions

1.5                   The Act may be cited as the Car Dealership Financing Guarantee Appropriation Act 2009 [Clause 1]

1.6                   The Act will commence on the day on which it receives the Royal Assent.  [Clause 2]

1.7                   The Deed of Guarantee is defined for the purposes of the Act.  [Clause 3]

1.8                   The Act will apply both inside or outside Australia.  [Clause 4]

 

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