Collateralized Car Obligations

The credit crunch was triggered by issues in Collateralized Loan Obligations (CLOs). Mortgage companies would package together a bunch of mortgages, slice them into different risk profiles (tranches) and resell the new securities to different companies looking for a certain return.

It should be possible to do something similar for remarketing, but hopefully without the negatives! Large consignors have hundreds of thousands of cars to sell a year. I’m sure they have statistics on the expected condition of their cars at the end of their fleet life (when the consignor decides to resell). The could segment cars based on condition, mileage, options, expected wholesale price, and underlying volatility for the dealer depending on make and model.

Dealers could purchase a given quantity of cars from a ‘tranche’ at a present date for delivery in the future. This is really a future/forward, but I thought CCO was a better acronym. The CCOs benefits both dealers and consignors.

Consignors can avoid the uncertainty of selling a car at auction, having a portfolio to manage, holding costs and, potentially, reconditioning costs. Instead of making decisions about where to sell the car, it is already sold.

Dealers can guarantee a constant flow of cars at a good price, depending upon the CCO discount. The discount should come from the time value of money, recondition risk of the car, and cost savings enjoyed by the consignor.

These CCOs could potentially be used to hedge car risk, as suggested in Fleet-ing Thoughts.

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