This lending firm sees dealers differently

Time was, dealers had few alternatives, short of signing their lives away, if they wanted to take out a loan to expand or improve their businesses.

These days offer a couple of ways to raise capital: enter into a real estate investment trust (REIT) or sell the dealership to a consolidator. Both have advantages and disadvantages.

But if dealers want to keep their real estate and their controlling interest, they have another place to go - Stamford, CT-based Falcon Financial.

"We provide long-term capital to dealers," explains Vernon Schwartz, Falcon's CEO. "We're an alternative to selling out...or bringing in a partner. We're the alternative for a dealer who says 'The world is changing. I want to consolidate. I want to build up my dealership group.'

"Traditionally he's never been able to raise long-term capital because nobody would lend a dealer long-term money. Nobody would lend him money on his blue-sky."

Blue sky is what dealers could expect to get if they sold their businesses. It also can be referred to as brand equity.

"That's what we lend against and no one else does," Mr. Schwartz says.

Falcon Financial and partners Sun-America Inc. and Goldman Sachs & Co. say they can lend dealers money because they look at the industry objectively.

Says Mr. Schwartz, "We looked at (the industry) as an outsider looks at any business. What are the risks? What is the historic performance of dealerships versus any other industry?

"If you look at failure rates of dealers, you'll see that on average the failure rate of dealers is about 1%. If you compare that to other industries, that is very, very good."

Another element to Falcon Financial's lending is that it is on a non-recourse basis, meaning that dealers do not have to personally sign for the loan.

"We're making long-term money available to the dealers based on their blue sky, as well as their real estate on a fixed-rate, non-recourse basis," Mr. Schwartz says.

He thinks dealers are perceived as high risks because of stereotypes and percep-tions in the marketplace.

He explains, "The perception of most lenders is that dealers are high risk. It's a transference of their feelings about dealerships rather than the reality. They think of dealers who are going to rip them off when they buy a car. I think that transfers into the commercial world.

"We looked at the data and came to our own conclusions. It's certainly no more risky than lending to other sectors."

Falcon recently completed a $115 million bond issue, the first security consisting entirely of auto dealership franchise loans.

Moody's Investors Service and Duff & Phelps Credit Rating Co. rated the transaction. A full 77% of the offering received an AAA rating and 86.5% received investment-grade ratings. Those are considered pretty good scores for a traditional bad risk.

"We got the best ratings anybody has ever received in franchise financing for a first-time issuer," says Mr. Schwartz.

Falcon Financial has lending safeguards, however.

The company wants a dealership's cash flow before debt service to cover its debts one and a half times. It also won't lend dealers more than 70% of the combined value of their real estate, their blue sky and their tangible net worth.

Then there's another test that's performed.

"As a sensitivity test, we look at what would happen if they didn't sell any cars," says Mr. Schwartz. "We look to see how much of their fixed costs are covered by their used-car and service businesses."

In business for nearly two years, Falcon's first pool of loans contained 20 deals. Mr. Schwartz says the company is looking at another 50. He hopes to close another $250 million to $300 million in loans in the next 12 months.

The dominant transactions thus far are to finance purchases of additional dealerships and assistance to general managers who are trying to buy dealerships from the principal.

"If the general manager already owns 30% of the dealership, he can buy the other 70% without having to come up with any more money," explains Mr. Schwartz.

Although none of the businesses Falcon has loaned money to has defaulted, company executives are confident the lender wouldn't lose too much if one or more of its dealerships do go belly-up.

"Our underwriting concentrates very much on brand and location," Mr. Schwartz states. "Our underlying theory is that the combination of the real estate value and our ability to find a new operator for that store will give us recovery."

Although manufacturers don't allow Falcon to take a security interest in the franchise agreement, "If a dealer goes bankrupt, the franchise agreement provides for a cancellation of the franchise. We feel relatively comfortable that the manufacturer will still have to pay us and/or the owner a fair value for their franchise."

Ford Knox National Co., an electronic payment systems firm, launches a pilot program with General Motors Acceptance Corp. that streamlines the collection process for late payments.

The program is called TrueCollect. It's expected to expand throughout the U.S.

It cuts time and effort spent dealing with delinquent customers, says Vice President J. Edward Hynes of Fort Knox National, based in Elizabethtown, KY.

Here's how it works:

The GMAC collector over the phone asks the customer to give verbal authorization to draft his bank account for a one-time payment. GMAC then passes the call to a TrueCollect representative who completes the transaction by obtaining necessary bank account information from the customer. GMAC collectors are able to move on to the next customer call.

Customer payments are in GMAC's bank account by the next business morning.

It's a win-win situation, says Mr. Hynes.

He explains, "GMAC wins because they receive their money more quickly. It helps their collectors to operate more efficient, and preserve the good relationship they already have with their customers.

"Customers win because it saves them the difficulty of sending a check. It's cheaper than other payment methods and they receive verification that their payment has been made."

Donald A. Winkler is the new chairman and CEO of Ford Motor Credit Co.

He was chairman and CEO of Finance One, a subsidiary of Bank One Corp.

"Don Winkler's global track record illustrates his understanding of changes sweeping the finance industry," says Ford CEO Jac Nasser. "His role in helping to make Ford the leading consumer company providing automotive goods and services is critical."

Mr. Winkler says, "I am looking forward to working with our dealer partners to strengthen customer relationships. I'm happy to join the energetic Ford Credit team of employees. Together, we will develop new growth opportunities."

Ford Motor Credit is the world's largest automotive finance company.