Consumer Portfolio Services, one of the few subprime auto financiers to have survived the 2008 credit crisis, will likely be able to weather the coronavirus pandemic due to its access to liquidity and provisions for credit losses.
CPS “looks to Wall Street” to keep its liquidity figures in line with origination volumes via warehouse credit facilities and the asset-backed securitization market, Chief Executive Charles Bradley said during the lender’s first-quarter earnings call today. The subprime lender’s funding capacity is $300 million, comprising three credit facilities that are “half full” he said. One of those credit lines will expire in September.
Further, CPS was able to go to market with a $260 million securitization at the beginning of the quarter, which nearly offset its $266 million in originations on its fair value portfolio.
“We used to do our securitizations at the end of the quarter, so we would’ve been trying to do a securitization at the end of March and we would not have been able to get one done,” Bradley said, noting CPS is targeting an issuance in July for its second ABS deal of the year.
On top of that, CPS qualified for an additional $23 million in funding from the federal government’s March 27 Coronavirus Aid, Relief and Economic Security (CARES) Act.
Overall, CPS’ total funding and liquidity figures are more than its origination volume, which is enough to support the lender throughout the pandemic. Bradley expects the lender’s origination volume to decline 50% during the next three months, or as long as shelter-in-place orders last.
The Irvine, Calif.-based lender is also well positioned to bear the weight of the expected increases in credit losses with its proactive implementation of current expected credit losses (CECL) during the last two years.
On Jan. 1, CPS set aside $127 million in lifetime losses for its legacy portfolio, or loans originated prior to January 2019, which should sustain the book until it eventually amortizes off, Chief Financial Officer Jeffrey Fritz said during the call. The legacy portfolio has finance receivables totaling $774.4 million and a net charge-off rate of 10.3%.
An additional $3.6 million was set aside to weather the COVID-19 storm. CPS has also tightened its underwriting standards by requiring higher income, raising the minimum credit score for its borrowers. “We are done making exceptions to any of our programs,” Bradley said.
While the lender has stopped its repossession efforts due to moratoriums at the state level, CPS will continue with its collection efforts and originations, he said. “We want to originate at a pace to keep our portfolio at a fixed status,” Bradley said.
Ultimately, CPS has structured its business in anticipation of a recession. As Bradley said during the 2019 Auto Finance Summit: “Winter is coming.”
“This isn’t the recession we were talking about and this isn’t how we ever thought this would happen,” Bradley said. “The longer this lasts the more painful it’ll be on our competitors — and maybe this is something that the industry needed. In the end it’ll be beneficial for all the [companies] that hang around.”
Total auto loans outstanding clocked in at $2.4 billion at the end of the quarter, and 30-plus day delinquency rate was 12.4%. Earnings per share came in at $0.45, and its stock [NASDAQ: CPSS] soared 51.9% to $2.37 a share at press time.