Podcast: Breaking down Tricolor Auto’s collapse  

Amanda Harris 0:16 Hello everyone, and welcome to the Road Map from Auto Finance News since 1996, the nation’s leading newsletter in automotive lending and leasing. It’s Monday, September 15th. I’m Amanda Harris. First, I’d like to thank our sponsor for this week’s podcast, The Work Number by Equifax. This week and last week, the main story was that Tricolor Holdings, along with its affiliate Tricolor Auto Acceptance and other affiliates, filed for bankruptcy. Tricolor filed for Chapter 7 protection, meaning the company is liquidating and has closed all its dealerships. The news that Tricolor was likely to file came amid reports that started about on September 5th, when a letter telling employees they were going on furlough began circulating on social media channels. Auto Finance News then was able to confirm on about on September 9th that the Buy Here Pay Here subprime auto lender was gearing up to file for bankruptcy with the. Filing actually coming the next day. Since then, rating agencies KBRA, Moody’s Ratings and S&P Global have put their ratings on the tricolor securitization deals that they rate on watch for a potential downgrade due to the bankruptcy and a potential for degradation in performance of the securitized loans. As the backup servicer takes over, Vervent Inc is named the backup servicer and they did tell us they are assessing the situation to facilitate a transfer of servicing, but called the situation fluid. Aidan Truth have further takeaways on the tricolor situation and its bigger picture impacts. So Aidan, take it away. Aidan Bush 1:44 Thank you so much, Amanda. So I think it’s really important to remember that Tricolor’s bankruptcy filing comes just a little over a month since subprime lender Automotive Credit Corp indefinitely paused all of its originations back in August. These two incidents happening relatively close to each other has prompted subprime lenders to re-examine sort of the headwinds around their market. It should be noted that Tricolor was a subprime lender, but it was also considered a buy here, pay here retailer. This meant Tricolor’s dealerships finance in-house, a distinct kind of niche within the broader subprime lending industry. For that reason, many of the leaders I spoke with at SAFCO, GLS and Same Day Auto Finance. Didn’t see an opportunity to grow in the wake of Tricolor’s exit. Rather, that would be kind of pushed off to other buy here, pay here lenders. That being said, what they did identify was a widening gap between smaller and larger subprime lenders as kind of after these exits. Namely, large lenders have a better ability to enter capital markets and more resources to invest in new technology, especially considering the volume of data they get in terms of their loan applications compared to smaller competitors. That data goes a long way in creating better score models and really just sort of a better prediction of their risk models. Going ahead, that really kind of covers up the immediate subprime sentiment as far as other lenders. But I’ll turn it over now to Truth for maybe some more insight on the floor plan lending aspect and kind of what may go on going forward. Truth Headlam 3:15 Thanks, Aiden. So while dealership bankruptcies, especially ones as large as Tricolor, aren’t unheard of, sources say that they’re still infrequent. More common forms of dealership closures include the selling of a business or.
A permanent closure, like in the instance of retirement without a sale. Still, when bankruptcies do occur, they’re more likely to occur in the independent space. In this scenario of a doership closure, unlike others, floor plan lenders options can be limited. First off, a bankruptcy requires all collection activities against the company to be stopped and every potential move. Against the dealership or the assets the dealership has. Has to be approved by the courts. But floor plan lenders can submit a relief from stay motion to the courts to try to get permission to secure the vehicles that they financed, since they are considered secured lenders with physical access with physical assets that are of security. 3D interest. Excuse me. However, it’s important to note that that motion can still be denied if the court deems that the evidence they provided isn’t sufficient enough. And to make matters worse, a bankruptcy can take years to play out in court. But Please note that like many court proceedings, there can be an appeal filed. But in the event that that appeal isn’t then granted, lenders can be waiting some time to get any kind of reward for their losses. And if fraud is involved, it can be much more complicated. But lenders can then initiate a civil lawsuit against the dealer and try to recover anything that they can from the business. But that can still mean that they are taking a loss and. It’s there’s no telling how large that loss can be, to be honest. Now back to you, Amanda, for some additional takeaways from last week. Amanda Harris 5:40 Great. Yes, thank you, Truth, and thank you, Aiden. Yes, there’s lots here. And of course, as a team, we will be following up with every step of this process. As Truth alluded to, bankruptcy is a lengthy process. There are a lot of court situations involved and steps to be taken. So we will be following all of that to see how this plays out. So to stay tuned, but a couple other highlights from last week in economic news, US job growth was slower through March with payrolls down by about 911,000 in a preliminary estimate. So we’ll have to keep an eye on that. And then in auto finance news outside of what we just covered, Linbuzz also issued an initial public offering on September 12th. The A I based lender writes under loans for thin or no credit file consumers and reports say the company is targeting a $1.5 billion valuation. The funding will largely be used to pay outstanding debt interest and support the company’s growth. Vietnam car maker Vinfast Auto also secured a $150 million loan from Barclays this week to. Support working capital needs. As always, thank you for joining us on the roadmap. Be sure to follow us on X and LinkedIn. Registration is also open for our upcoming Auto Finance Summit 2025 and Power Source Finance Summit, which is actually kicking off next week in this month. As always, we will see you online at autofinancenews.net and here next time. And again, thank you to our. Sponsor Equifax. Lenders who leverage income and employment verifications through Equifax as the work number see about a 48% higher likelihood of loans closing. We appreciate their support. Thank you all.