CPS raises $50M in residuals financing on ABS market

The cost of funds continues to remain historically low in the asset-back securities market, prompting Consumer Portfolio Services on June 30 to sell $50 million in 7.86% notes backed by residual interests. The notes, issued by CPS Auto Securitization Trust, are backed by residual interest retained from the lenders’ auto securitizations from January 2018 through September 2020. While auto lenders are required to retain at least 5% of residual interest in securitized assets under the Dodd-Frank Act, once all investor notes are paid off, lenders can repackage any remaining notes into an additional securitization pool and issue investor notes to raise additional capital. “We raised $50 million in new capital,” Chief Executive Charles Bradley said Thursday on CPS’ second-quarter earnings call. “The best time to raise capital is when you don't need it, and so we did. We got a nice rate on that and that'll be helpful in the future as we continue to grow.” Bradley last quarter noted that cost of funds will likely remain low for the foreseeable future. CPS’ blended cost of funds on its January $230.5 million auto ABS deal declined to 1.11% , the lowest in the company’s history. The lender’s blended cost of funds for its total ABS debt was 3.7% in the second quarter, down from 4.5% a year ago, Chief Financial Officer Jeff Fritz said on the call. “This is a significant liquidity event for us, in addition to the cash we've built up over the last year from better-than-expected credit performance. We're in the strongest liquidity position we've ever been, which allows us to rely less on warehouse financing,” Fritz said, noting CPS is using just $77 million of its $200 million warehouse capacity. It’s not uncommon for lenders to source funding in multiple ways on the ABS market, especially as auto ABS is the “strongest it has been in a very long time,” Elen Callahan, managing director and head of Research with the Structured Finance Association, told Auto Finance News . Consumer Portfolio Services also continues to grow its auto book. After rebounding to pre-pandemic levels last quarter, originations climbed to $286 million, a sequential increase of 39.2% and an increase of 110.5% YoY, according to the earnings release. Originations reached the highest level since the second quarter of 2016, largely due to the subprime lenders’ increased focus on data analytics in its underwriting, Bradley said on the call. Auto outstandings clocked in at $2.1 billion, a decrease of 9% YoY, while receivables measured at fair value totaled $1.6 billion, a 4% YoY increase. The legacy portfolio continues to run off, standing at $346 million in the second quarter, Fritz said. Credit is performing well in part due to federal stimulus, but also can be attributed to CPS’ collection and origination practices, Bradley said. Delinquencies 30-plus days past due came in at 7.34%, a decrease of 43 basis points from last quarter and 41 bps YoY, according to the earnings release. Annualized net charge-offs fell to 2.79% of the lender’s portfolio, down from 6.3% last quarter and 7.32% during the same period a year ago. Recovery rates also increased to 57.8%, up from 34% a year ago. Interest expense for the three months ended June 30 clocked in at $467,000, compared with $920,000 in the same period a year ago, according to the company’s Form 10-Q filed June 30. For the third consecutive quarter, CPS did not add to its provision for credit losses, Fritz said. For comparison, during the same period a year ago, provisions totaled $3.1 million. Allowance for loan losses accounted for 21.2% of receivables in the second quarter of 2021, an increase of 6.5% YoY. Meanwhile, CPS has set its sights on growth, adding to its sales force and expanding into new geographic regions, with a goal to partner with 10,000 active dealers, up from the current 6,000, Bradley said. Due to the ongoing COVID-19 pandemic, CPS has adopted a hybrid work model, allowing employees to work half the time at home and half in a physical office, a move that will likely result in the company cutting down office space in the coming months, Bradley noted. Shares of CPS [Nasdaq: CPSS] were trading at $5.62 as of 2:00 p.m. ET today, down 0.62% from market open. CPS has a market capitalization of $127.51 million. Auto Finance Summit, the premier industry event, returns October 27-29 in Las Vegas. The Summit continues to bring together the best and brightest in the industry year after year for unparalleled networking and professional education. To learn more about the 2021 event and register, visit www.AutoFinanceSummit.com .

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