In the recovery period following the great recession there was a surge of private-equity investment in the auto finance space, but since then enthusiasm has waned.
Several firms are looking for an exit ramp from properties they have sunk billions of dollars into as delinquencies soar. Independent finance companies have been unable to stop delinquencies of 90 days or more from rising to nearly 10% of their portfolio — levels not seen since the great recession, according to data from the New York Federal Reserve.
Of course, the difference now is that the economy is particularly strong as unemployment has hovered just above 4% through 2017, according to the Bureau of Labor Statistics.
The following is a list of private-equity trends to watch as the year plays out.
1. Flagship’s Looming IPO
Innovatus Capital Partners manages Flagship Credit Acceptance on behalf of Perella Weinberg and has been toying with the possibility of an initial public offering for years, but has struggled to make the lender profitable, according to a report from Bloomberg.
Flagship has tightened its credit underwriting throughout 2017 including increasing pricing on loans originated, reducing originations in the lowest quality indirect and direct tiers, and discontinued the military lending program, according to a Kroll Bond Rating Agency‘s report.
Although losses were still up and originations down in 2017, Kroll expects the company will return to profitability this year. Flagship declines to comment about a possible IPO.
Blackstone Group LP has sunk half a billion dollars into Exeter Finance Corp. since 2011, changed out the executive team multiple times, and may look to “unload” the lender this year, according to the Bloomberg report.
Unlike Flagship, Exeter has managed to be profitable for two years running, but bad loans made in 2015 have come back to bite the financier. Two bonds Exeter previously issued backed by loans made in 2015 have had to dip into extra collateral to keep investors whole, according to Bloomberg.
Yet, Exeter is off to a good start this year as S&P Ratings gave the company its first AAA score on its 2018-1 bond. Additionally, Moody’s rated Exeter for the first time ever and came up with the same AAA score.
Once upon a time, the subprime behemoth Santander Consumer USA was also a private-equity venture and investors are closely watching its success to serve as a barometer for how other IPOs will perform.
Since going public in January 2014, Santander Consumer’s shares have lost about a quarter of their value — not exactly instilling confidence in investors.
Santander attempted to lower delinquencies and losses by tightening its underwriting standards and pursuing higher credit borrowers and leases from its partnership with Chrysler Capital. However, delinquencies continue to rise despite a 35% rise in lease originations in the fourth quarter compared to the same period the year prior, and its share of financing to consumers with credit scores of 640 or higher up 4%.
Short- and long-term delinquencies were both up 30 basis points as a percentage of the overall portfolio, according to fourth-quarter earnings. Meanwhile, net charge-offs were up above 10% of the portfolio — a 40 basis point increase year over year.
Other private-equity firms may look to go public or sell off their assets in 2018, but there’s “currently no market for such exits,” according to Bloomberg. Many companies may have to settle for selling their assets for book value.
Still, there is some reason to believe that the market could improve. Lenders have been tightening credit underwriting standards and should start to see year-over-year declines in delinquencies and charge-offs as the year progresses.
Big banks have also pulled back from the subprime space which could provide an opportunity for independent lenders to grow into the space again. However, Black Book believes that buy-here, pay-here dealers will be the ones to more aggressively grow into that space.
Given that new auto sales are projected to decline this year, a Morgan Stanley analyst believes that will result in more credit being extended to consumers. Additionally, increased vehicle depreciation will make the used-car market more attractive to consumers and could be a boon to subprime lenders.
5. Investment Shifts to Mobility
It’s clear that investment has been more focused on the mobility space rather than traditional subprime lenders.
The latest investment is used leasing app Fair’s announced of its acquisition of Uber Technologies Inc.’s Xchange Leasing program. The startup not only acquired a substantial pool of used vehicles, but also a deal with Uber in which drivers looking for a car on a 30-day term or longer will be exclusively directed to Fair.
All that money went, in part, to the undisclosed closing sum of the deal, but part of it is also going to Fair’s efforts to get the company up to scale so they can start serving consumers nationwide, Scott Painter, chief executive of the startup, told Auto Finance News.
“Part of getting this deal across the finish line was ensuring that we’re able to instantly support an entire driver community of drivers under contract as well as drivers we intend to add,” Painter said. “We’ve opened up a Phoenix site and are actively in the process of staffing and training up. We’re not disclosing the number, but there is an immediate effort to service those consumers immediately.”
For more content like this, attend the third annual Auto Finance Innovation event, slated for March 7-8, at the Parc 55 in San Francisco. For information, or to register, visit autofinanceinnovation.com.Like This Post