Pierre Money Mart Blog

IRVING, Texas — CitiFinancial Auto has undergone some restructuring of late in response to the ongoing difficult sales environment.

Kim Pulliam, senior vice president at CitiFinancial Auto, told SubPrime Auto Finance News this morning that the company notified dealers of the changes last week. Basically, she explained that the company has moved to a model which separates the buying function and the interface with the dealer.

Overall, the company has centralized its underwriting and loan processing, which did involve some layoffs throughout the country at regional offices. Some of the regional offices that previously handled underwriting and processing have now been converted to buying offices, she explained. While some associates were laid off, in some instances, others were switched from underwriting to buying.

According to Pulliam, dealers should not notice too many changes except for perhaps the localized representative that they work with. They may get a new one as associates were shifted into different positions. Dealers may also see a change in where they are sending contracts.

Most of the changes are taking place behind the scenes, she indicated.

The inspiration behind the moves was, “Let’s keep localized functions which the dealers care about and what they need, and take those functions that don’t interface with the dealer out of the local marketplace,” Pulliam said.

As for its number of dealer partnerships, she told SubPrime Auto Finance News that the company has not made any changes.

“We are committed to those levels,” Pulliam pointed out.

However, dealers may have noticed that the company is being more selective in the subprime applications it approves.

When asked about the spectrum of loans generally approved, Pulliam responded, “I wouldn’t necessarily say we’re doing higher quality, but we are being more selective in the deeper credit. We’re being very focused and more safe and sound.”

Ultimately, she said the changes are designed to make CitiFinancial Auto “evolve and be stronger.”

FORT WORTH, Texas — AmeriCredit’s management described the fiscal-year third quarter as difficult despite processes they have already taken to trim dealer relationships, raise minimum cutoff scores, lower loan-to-value and control other credit costs.

In addition to the tighter lending requirements, the company has also been facing a tough capital market when shopping for securitizations, which are vital for business.

Company Overview

Explaining the current environment, Dan Berce, president and chief executive officer, said, “With this credit tightening, our average custom credit score in our core subprime originations increased eight points which had the impact of reducing approval rates to approximately 20 percent from 30 percent. And loan-to-value for our subprime originations decreased approximately 5 percentage points to 115 percent.

“Because of the credit tightening measures we implemented, we expect loans originated in 2008 to show meaningful improvement in cumulative net losses as compared to the 2006 and 2007 vintages,” he continued.

Berce went on to explain that the company has reduced its annualized origination run rate to the $3 billion range.

“We believe that this lower origination level will provide us the flexibility to operate within currently available warehouse capacity and liquidity constraints, assuming limited access to the securitization market,” he reported.

“While we remain committed to offering a full spectrum of financing options to our key dealer relationships, we will continue to evaluate the profitability and efficiency of our existing partnerships and business lines as we manage origination value,” Berce said. “To this end, we have discontinued new originations in our direct lending and leasing platforms as well as certain partner relationships.”

In some ways, Berce said the overall credit challenges have helped the company, as other auto lenders pull back as well.

“The industry-wide retrenchment has led to an improved competitive environment, which we were able to take advantage of to tighten credit while maintaining loan pricing,” he stated.

“For the remainder of calendar-year 2008, we will look to maintain higher credit standards while seeking to incrementally increase pricing and profitability in certain markets and credit ranges,” Berce added.

Financial Statistics

The company’s net income was down compared to the prior year. In fact, AmeriCredit posted net income of $38 million, or 31 cents per share, for its fiscal third quarter, compared to net income of $104 million, or 80 cents per share, last year.

For the nine-month period, the company reported net income of $81 million, or 65 cents per share, compared with $273 million, or $2.06 per share, in the prior year.

Officials noted that net income for the quarter included a $10 million after-tax gain related to the sale of AmeriCredit’s investment in DealerTrack Holdings, and a $21 million adjustment to reserves for contingent tax positions.

Additionally, executives said that net income for the nine-month period included a $33 million after-tax gain related to the sale of AmeriCredit’s investment in DealerTrack Holdings.

Auto loan purchases came in at $1.33 billion for the quarter, compared with $2.52 billion last year. Loans purchased for the nine-month period totaled $5.51 billion, compared with $5.94 billion in the previous year.

Officials also reported that managed receivables were $15.82 billion, compared with $15.15 billion in the prior fiscal-year period.

Recovery rates remained steady at 44 percent for the quarter when compared to the December period, but down from a year ago.

Speaking to the company’s balance sheet, in addition to capital and liquidity positions, during AmeriCredit’s conference call was Chris Choate, chief financial officer.

Discussing loss provisions, he said, “We recorded a provision for loan losses of $251 million, or 6.2 percent, of average receivables for the March quarter. The allowance for losses was 5.7 percent at March 31, 2008, compared to 5.6 percent at Dec. 31, 2007.

“The increase in allowance for loan losses reflects our expectation that credit performance, including used-car values, will remain weak through the remainder of the calendar year. Finally, consistent with our approach in the December quarter, our allowance and provision for loan losses does not explicitly assume further deterioration in the economic environment,” Choate explained.

Capital

He then moved on to talk about funding, indicating that the company had hoped to strike a securitization deal during the quarter; however, the uncertainty in the capital markets made this difficult.

“Over the past several weeks there have been some signs of improvement as several prime auto, equipment and credit card securitizations and one subprime auto securitization have been completed,” Choate pointed out.

“So, although the successful completion of these recent deals may evidence improving liquidity in the ABS market, markets generally and increased investor demand for auto dealers specifically, there continues to be uncertainty about effective execution of larger subprime issuances under our AMCAR program,” he related.

To mitigate risk, a few weeks ago the company entered into a forward purchase agreement with an affiliate of Deutsche Bank.

“We believe there will be sufficient investor demand for the shorter-date tranches in our securitizations but more limited demand for the longer-dated tranches,” Choate explained. “Our plan will be to use the Deutsche commitment primarily for the longer-date tranches in our securitization transactions in order to leverage this commitment and issue more than $2 billion in total securitization notes.

“This will help clear out existing loan inventory on our warehouse lines and free up borrowing capacity,” he continued. “Assuming that we fully utilize Deutsche’s commitment to purchase unsold notes over the next year, we will realize marginally profitable returns on loans originated during the back half of calendar 2007. We should realize significantly better risk-adjusted returns on loans originated after the credit tightening that began in late January.”

Moreover, Choate said that with this forward purchase agreement under the company’s belt, the management team will aim at executing an AMCAR securitization during this quarter.

As for existing securitizations, there have been some challenges, Choate noted.

“As we mentioned in our January conference call, three Long Beach securitizations, 2006-A, 2006-B and 2007-A, breached their level on performance triggers. As part of our arrangement with FSA, we agreed to use excess cash flows from our current FSA-insured securitizations to help fund the higher credit enhancement requirements brought on by these trigger breaches,” he reported. “Through the April distribution date, $37 million of cash otherwise distributable to AmeriCredit was used to fund the higher credit enhancement requirements.

“We anticipate that we will reach those requirements for our May trust distribution date and will once again be receiving cash distributions from our FSA-insured AMCAR securitizations,” Choate predicted.

The CFO went on to indicate that the company is keeping a close eye on the performance of the 2007-2-M APART transaction that was completed in October. He said this attention is largely due to its high concentration of Long Beach collateral.

“Earlier this month we entered into an agreement with another of our securitization bond insurers, MBIA, to increase performance triggers in this APART transaction to provide us more leeway as we continue to experience increased credit pressures in this trust due to the problems we have previously discussed with the Long Beach portfolio,” Choate commented.

“In return, we agreed to provide MBIA with a limited-cross collateralization from excess cash generated from securitization transactions insured by MBIA,” he added. “In April, $13 million of cash otherwise distributable to AmeriCredit from MBIA-insured transactions was used to fund the target credit enhancement for 2007-2-M. We anticipate that it will take an additional two months and $21 million to satisfy the higher credit enhancement requirements in this transaction.”

As for possible future breaches, Choate said, “Assuming that the economic environment does not deteriorate further, we do not currently expect any additional securitization transactions to breach their performance triggers during the remainder of the calendar year.”

Reviewing liquidity, Choate indicated that as of March 31, the company had $484 million on unrestricted cash, down from $567 million at Dec. 31 of last year.

“With the cash that will begin to accumulate from the run-off of our $15.8 billion portfolio, we expect to maintain unrestricted cash in approximately the range of $300 to $400 million throughout the calendar year,” he said.

In his own words Choate said that embedded in the company’s liquidity forecast are the following assumptions:

—”Our origination target for this calendar year will result in run-off of our portfolio of about $3 billion by Dec. 31. This run-off will result in the release to us of about 15 percent in capital supporting these receivables.

—Our subprime warehouse facilities carry an effective enhancement level of about 15 percent. This enhancement level will increase to the low 20-percent range at the time of securitization. Accordingly, the net impact of a securitization would be cash usage of about 5 to 7 percent.

—Soft consumer credit will continue to result in lower distributions from securitization trust and higher delinquencies in unsecuritized receivables.

—Cash trapping under the limited-cross collateralization arrangements with FSA and MBIA will conclude over the next couple of months.

—We will be able to access the securitization market and issue at least $2 billion of FSA-wrapped securitization notes by calendar-year end.

—Warehouse credit facilities that are maturing this year will either be reduced or eliminated.

—We will repay our $200 million convertible notes in November.”

He went on to say, “We had available warehouse capacity to support an additional $2.5 billion of originations at March 31. Subsequent to quarter end, we amended our prime/near prime warehouse facility to address a potential covenant violation in the facility related to credit losses in our Bay View and Long Beach portfolios. The size of this facility was reduced to $1.12 billion and the effective advance rate decreased to below 80 percent.

“With this amendment, we are in compliance with the covenants in all our warehouse facilities, and we have available warehouse capacity to support an additional $2 billion of originations as of today’s conference call (April 24),” Choate said.

With the $500 million call and the $1.12 billion prime/near-prime facilities coming near renewal dates in August and September, Choate indicated that AmeriCredit is in talks.

“We are having preliminary discussions with our lenders on the renewals of these facilities and anticipate that one or both of these facilities could be reduced in capacity size or even eliminated,” he explained. “However, with our lower origination targets and the freed-up warehouse capacity, we should achieve through securitizations supported by the Deutsche commitment, we should have sufficient warehouse capacity into calendar 2009.”

In addition to the consolidation and closing of several branch offices, along with staff reductions, which occurred in March, Choate said more cuts may be made.

“We expect to have some additional staff reductions in the June quarter as we seek to maintain an operating expense ratio in the mid 2-percent range over time even with a declining portfolio balance,” he stated.

Choate then turned the conference call back to Berce.

No Future Guidance

With the management more focused on near-term results than long term, Berce explained that the company is no longer providing earnings guidance.

“One final note, given the uncertainty affecting key elements of our financial forecast, including the timing and funding cost of future securitization transactions and the volatility in consumer credit performance, we are no longer providing earnings’ guidance,” he said. “Instead, through our prepared remarks today, we have set out our outlook for key performance metrics for our business.”

Wrapping up the conference call, Berce indicated, “In conclusion, as we continue to navigate through this economic downturn, we remain vigilant in monitoring both the credit and capital markets’ environment and will take further actions, if necessary, to conserve liquidity and protect the long-term value of our franchise.”

This isn’t the first time the company’s business model has been tested, he pointed out, saying, “We are confident that the strength and value of the platform will be affirmed on the other side of this economic cycle.”

ATLANTA — Manheim addressed financial-market health in its 2008 Used-Car Market Report, including discussing the market instability in 2007 driven by the subprime mortgage downfall, the impact of this on the auto sector and what the future may bring.

Overall, the report reassured the industry that the auto lending arena remains stable, despite credit-market tightening; however, it did caution financial institutions to be cautious in their growth and remain true to previously learned lending/underwriting principles to remain profitable.

While the auto financing sector as a whole continues to thrive, albeit more reservedly, market analysts indicated that the impact of the subprime meltdown will be ongoing for 2008, and perhaps beyond.

Impact of Subprime Mortgage Woes on Auto Industry

Kicking it off, Manheim discussed the credit instability that hit the market in the summer of last year, indicating that the lingering effects continue to impact the economy and auto industry in 2008.

“In early August 2007, the long-feared spillover of subprime mortgage problems into the broader credit market occurred with a vengeance,” officials described. “Surprisingly, or maybe not so surprisingly in this age of global finance, European banks were the first to scramble for cash as their overexposure to subprime mortgages and derivative instruments became clear.

“That panic jumped the Atlantic the same day, and in the ensuing weeks, Federal Reserve officials and banking executives discussed and wrestled to create solutions that could restore stability,” executives continued.

The resulting actions were that the Federal Reserve moved quickly to reassure the financial community and instituted various rate cuts.

“From mid-August 2007 to mid-January 2008, the federal funds’ target rate was reduced from 5.25 percent to 3.50 percent. The steepness of this decline is almost unprecedented,” Manheim pointed out.

“Although residual weakness in the credit market remained at year-end, a full collapse (which was closer than most Americans knew) was avoided. Given that credit availability is the life-blood of both the new- and used-vehicle sales markets, things could have been much worse in our industry,” analysts explained.

“Cost and availability of credit is key to retail used-vehicle sales. It was heartening, therefore, that the retail auto financing market functioned well throughout 2007, even while there was great turmoil, stress and volatility in the broader credit market overall,” the market overview attested.

As several subprime mortgage lenders drown in their credit problems, investment analysts appeared to turn their speculation on the subprime auto industry to see if it would follow suit.

“What they found, however, was an industry with solid management and a well-developed business model,” Manheim’s Used-Car Market Report found. “Consider, for example, the key reasons why many subprime mortgages failed and contrast that with auto lending.”

In the “glory days” of the mortgage broker arena, “no documentation and no down payment” became typical. The company described the mortgage sector as in its “infancy,” with many players thinking underlying collateral, or the home, would grow in value quickly, offsetting risk.

“In contrast, subprime auto lending is a mature industry where the lenders have gone through previous credit cycles and learned from the experience,” the company pointed out. “Sometimes, auto lenders will aggressively go after business, but they never completely throw out their scoring models.”

Identifying one of the key problems in the mortgage sector, Manheim pointed to the brokers, who generally had no stake in the loan success.

“Their objective (compensation) was based on simply doing deals — even loans that had no hope of ever being repaid,” officials explained. “On the auto-lending side, dealers, F&I managers and lenders have long-established practices that reinforce (and compensate) mutual success.”

Low teaser rates and payment-option mortgages easily caused issues with consumers when climbing interest rates and depreciating home values cut off homeowners from any other option but to default.

“Unlike mortgage lenders, auto lenders never delude themselves into thinking the underlying collateral will rise in value and, thus, make even a bad loan good. And when it becomes necessary to liquidate the collateral, auto finance companies have, in the form of auctions, a mechanism to quickly realize market value,” executives described.

When it comes to homes, market value is a much more subjective term, depending on the volume of foreclosures, the regions they are located in and housing demand.

“In contrast, a rise in auto repossessions has only a marginal impact on vehicle values, given that the wholesale market is so large and liquid,” Manheim highlighted.

And yet despite these factors, Manheim said, “However, having sound business practices does not make auto lenders totally immune to the broader forces in the credit markets. Because of the stress in the credit markets in late 2007 (and also due to weaker household finances), auto lenders (across the spectrum) felt it prudent to lower permissible loan-to-value and payment-to-income ratios and accept any slowing in originations those actions might produce.

“This had, and will have, a dampening effect on the retail used-vehicle market in the short term, but it should ensure healthy credit availability over the longer term,” executives wrote.

Overall Credit Industry

According to Manheim’s analysis, more than $450 billion new- and used-vehicle loans were written last year, ranging the entire credit spectrum.

From 2002, the company said that term length has been increasing. More specifically, by 2007, 41 percent of securitized prime auto loans had terms greater than 60 months, up from 12 percent five years ago.

As for securitized subprime loans, those with terms greater than 60 months jumped to 67 percent from 33 percent in 2002.

“For lenders, the implications of longer-term loans are generally not positive,” Manheim indicated. “Longer loans result in slower principal repayment and can cause a greater severity of loss on repossessions. Additionally, the longer borrowers remain in negative equity, the more likely they will simply walk on the loan.”

Additionally, executives explained, “Even absent a repossession, a greater frequency and magnitude of negative equity can slow sales, reduce the amount available for future down payments, or lower overall credit standards.”

However, the industry found it hard to resist lengthening loan terms, as it makes the monthly payment more attractive for customers, not to mention the need to compete with other lenders.

Now that vehicle age has increased, Manheim noted that this move toward longer loans may not be quite as risky as it was in the past. That is, if it is done correctly, of course.

The report also shared some collateral trends, based on data from Standard & Poor’s:

Prime

2007

Weighted Average FICO: 713

Percentage of Original Maturity Greater Than 60 Months: 40.92 percent

Percentage Used: 21.61 percent

Weighted Average APR: 5.46 percent

2006

Weighted Average FICO: 716

Percentage of Original Maturity Greater Than 60 Months: 38.56 percent

Percentage Used: 21.98 percent

Weighted Average APR: 5.68 percent

2005

Weighted Average FICO: 719

Percentage of Original Maturity Greater Than 60 Months: 31.61 percent

Percentage Used: 24.62 percent

Weighted Average APR: 5.79 percent

Non-Prime

2007

Weighted Average FICO: 655

Percentage of Original Maturity Greater Than 60 Months: 81.41 percent

Percentage Used: 66.50 percent

Weighted Average APR: 9.69 percent

2006

Weighted Average FICO: 654

Percentage of Original Maturity Greater Than 60 Months: 66.17 percent

Percentage Used: 55.11 percent

Weighted Average APR: 11.43 percent

2005

Weighted Average FICO: 650

Percentage of Original Maturity Greater Than 60 Months: 56.35 percent

Percentage Used: 62.01 percent

Weighted Average APR: 10.81 percent

Subprime

2007

Weighted Average FICO: 601

Percentage of Original Maturity Greater Than 60 Months: 67.25 percent

Percentage Used: 73.59 percent

Weighted Average APR: 15.56 percent

2006

Weighted Average FICO: 591

Percentage of Original Maturity Greater Than 60 Months: 52.50 percent

Percentage Used: 63.57 percent

Weighted Average APR: 14.95 percent

2005

Weighted Average FICO: 592

Percentage of Original Maturity Greater Than 60 Months: 52.60 percent

Percentage Used: 63.57 percent

Weighted Average APR: 14.95 percent

Delinquencies and Repossessions

The fallout in the mortgage industry ramped up pressure on consumer finances, ultimately leading auto delinquency rates to climb, which in turn led to an increase in the number of repossessions.

In fact, Manheim reported that total repossessed vehicles grew 10 percent over 2006.

“Delinquency rates did, however, uptick as the year progressed, reflecting the slower labor market and the tremendous pressure placed on household finances by higher gas prices, mortgage rate resets and the weight of past debt obligations,” the company said.

Overall, no particular type of vehicle was more widely impacted than another.

“The repossessed vehicles sold at auction could have come from a prime, new-vehicle contract on a high-end luxury car that went bad early in the term, from a subprime loan on a low-end vehicle that defaulted late in the term, or anything in between. As such, repossessions at auction represent of wide mix with respect to model, age, mileage, condition and price,” the market analysts attested.

Auto Lender and Auction Partnerships

Manheim’s Used-Car Market Report also pointed out that many lenders have tended to work with franchised dealers over the years, and are, interestingly enough, now seeking out relationships with independent dealers.

“Auctions are uniquely positioned to help here, given their daily interaction with thousands of independent dealers,” officials stated.

Real-time pricing information from auctions can also assist auto lenders in setting realistic loan-to-value ratios, or explain how certain types of vehicles and styles are performing at auction.

“And, since auction pricing is recognized as representing true market conditions, lenders use that information in their communications with the investment community,” Manheim explained. “For example, several lenders cite the Manheim Used Vehicle Value Index in their SEC filings to provide analysts and shareholders with a perspective on overall used-vehicle pricing conditions.”

Moreover, the report went on to indicate, “Together, auctions and lenders can also make strategic decisions to improve remarketing performance.

“For example, Manheim can help lenders with only a few repossessions, or repossessions geographically dispersed, combining their vehicles with those of other lenders in special, highly marketed sales events,” the company concluded.

WESTLAKE VILLAGE, Calif. — What is the best way to drive lender success in these troubled times? According to J.D. Power and Associates it boils down to just one thing — dealer relationship.

Releasing its J.D. Power and Associates 2008 Dealer Financing Satisfaction Study this morning, which for the first time analyzed subprime dealer satisfaction, officials stressed that developing the dealer-lender relationship is particularly important given the current economic struggles and market turmoil.

For instance, within the floor planning segment, 44 percent of dealers report that the relationship with a lender is their primary reason for selecting a provider.

Similarly, the dealer-lender relationship is cited most often as the primary reason for choosing a finance provider in the subprime retail credit segment.

“In today’s tough times, automotive lending priorities may be focused on the issues of liquidity and risk rather than dealer satisfaction, but lenders cannot afford to miss the growth opportunity tied to dealer satisfaction,” explained Rich Howse, senior director of the automotive finance practice for J.D. Power.

“Dealers recognize those lenders that make the effort to partner with them for the long haul, so building and maintaining strong relationships with dealers will be the foundation of future revenue growth as the industry rebounds,” he highlighted.

Going hand in hand with relationship, auto finance providers that achieve high levels of satisfaction among dealers also tend to receive a larger share of business from those dealerships.

Some aspects of financing service that are particularly important to maximizing dealer satisfaction are the ability to interact with a single credit buyer, short application approval times and expedient funding, the company indicated.

Within the prime retail credit segment, dealers who are “delighted” with their lender provide the lender with 53 percent of the loan originations generated at the dealership on average, while dealers who report being merely “satisfied” provide lenders with 40 percent.

In contrast, however, dealers who are “dissatisfied” with their lender give the company only 26 percent of their business, on average

“Dealer satisfaction with automotive lenders clearly impacts the volume of retail business a lender receives,” noted Howse.

“With more than 20,000 dealerships in the U.S., the potential revenue linked to increasing satisfaction can translate to billions of dollars. For instance, in the prime retail credit segment, the difference between just one dealer who indicates they are ‘delighted’ and one who indicates they are ‘dissatisfied’ can mean an average of more than $3 million in additional loan originations in one year,” he pointed out.

Breaking it down, the J.D Power study investigated dealer satisfaction with finance providers in four segments: prime retail credit; retail leasing; subprime retail credit; and floor planning.

It examined five key factors that contribute to satisfaction within the prime retail credit, retail leasing and subprime retail credit segments, including provider offering, credit personnel, application/approval process, termination policy/service and sales representative relationship.

Furthermore, four factors were measured in the floor-planning segment, including provider offering, floor plan support personnel, inventory process and process/service.

After all these categories were tallied, J.D. Power found that one lender swept them all — BMW Financial Services.

“We’re proud of our consistently high rankings on this important study. We have more top awards for dealer satisfaction than any other individual financial services company since this study was introduced 14 years ago, explained Edward Robinson, president and chief executive officer for BMW Financial Services, Americas region.

“But to capture four top rankings in one year is phenomenal and a demonstration to our dedication to serving our dealer customers,” he continued. “This is the fifth consecutive year that we are at the top of the retail lease category.

He went on to say that, “In a difficult business environment, when many lenders have abandoned all or segments of the automotive finance business, we remain committed to providing a full complement of financial services to our dealer customers.

“Our dealers acknowledge the importance we place on their business and our role in supporting them. We appreciate their support with the feedback provided in all the measurements that comprise this comprehensive study,” he added.

According to J.D. Power the rankings came in as follows:

Prime Retail Credit

BMW Financial Services took the highest ranking in prime retail credit satisfaction with an index score of 946 on a 1,000-point scale, performing particularly well in four factors driving dealer satisfaction, credit personnel, application/approval process, termination policy/service and sales representative relationship.

Alphera Financial Services (a BMW Financial related provider) at 940 and Volkswagen Credit at 938 followed BMW Financial Services in the rankings.

Retail Leasing

With a score of 942, BMW Financial Services also ranked highest in retail leasing satisfaction for a fifth consecutive year, performing particularly well in credit personnel, termination policy/service and application/approval process.

Volkswagen Credit at 934 and Mercedes-Benz Financial at 924 follow in the segment.

Subprime Retail Credit

In the subprime retail credit segment, which is new to the 2008 study, interestingly enough, BMW Financial Services took home the highest rank, with a score of 966, performing well across all factors driving satisfaction.

Volkswagen Credit followed with 943, and GMAC ranked third in the segment with 922.

Floor Planning

Continuing its sweep, BMW Financial Services ranked highest in floor planning with a score of 963, performing well in all four of the factors that drive satisfaction.

Volkswagen Credit followed closely in the rankings at 960 and Audi Financial Services ranked third in the segment with 940.

The 2008 Dealer Financing Satisfaction Study was based on responses from 4,770 dealer principals who were surveyed March through July 2008.

NORTH RICHLAND HILLS, Texas — Triad Financial stopped all originations via its indirect dealer channel as of May 23, company officials told SubPrime Auto Finance News this week.

However, Triad continues to originate loans through RoadLoans, its direct lending channel, executives indicated.

Discussing the reasoning behind the move to cease operations in its indirect channel, the company explained, “Conditions in the financial markets have been extraordinarily unstable and have hindered our ability to adequately and cost-effectively fund future business through traditional methods, including asset-backed securitizations.”

The statement went on to say, “Triad has served the dealer community for more than 18 years and values the relationships we have enjoyed with these dealers and the customers we share. We will no longer accept new applications as of 5 p.m., May 23.”

The company also reported that it will honor existing approvals and fund eligible contracts forwarded by dealers through June 23.

Overall, officials said, “This announcement affects approximately 220 employees who work primarily in the indirect lending organization.”

In addition to continuing to approve loans via its direct lending channel, Triad reported it will “also continue its portfolio management operations at its corporate headquarters in North Richland Hills, Texas, with related customer care, loan servicing, loss recovery and remarketing functions there.”

Moreover, the company said it will continue to employee support staff at both its Texas-based and Huntington Beach-based facilities, representing almost 1,000 associates.

Looking to the future, Scott France, senior vice president of portfolio management, told SubPrime Auto Finance News, “We have a multibillion-dollar portfolio to manage, and we are very pleased with our results in terms of improved servicing levels and decreased delinquency.

“In addition, we have been working on a new and improved remarketing program, including the development of a best-in-class certification program, which we look forward to rolling out this summer. This new program will better meet the needs of dealers and auctions, and boost revenue for everyone involved,” he added.

Triad’s Latest SEC Filing

According to the company’s latest quarterly SEC report filed May 14, in early May, Triad Financial and some of its subsidiaries agreed to amend its Warehouse Lending Agreement, which was dated April 29, 2005.

The amendments included several items:

—Triad will borrow a maximum of $125 million between May 6 and June 30 to purchase newly originated contracts, in addition to the amount currently drawn under the facility, which was about $505 million as of May 6.
—After June 30, there will be no additional borrowings.

—After June 1, all collections from contracts pledged under the Warehouse Lending Agreement will be used to pay down the loans.

Furthermore, in the SEC filing, the company indicated that its Master Residual Loan Agreement also underwent some amendments:

—After May 8 there will be no new borrowings, in addition to the amount currently drawn under the facility, which is about $67 million as of May 6.

—For the period of May 6 to June 30, after payments of interest and fees, 75 percent of remaining collections from the securitization trusts’ residual assets will be paid to the lender in respect of principal, and any amounts remaining thereafter will be distributed as set forth in the Residual Loan Agreement, including for payment to Residual LLC.

—After June 30, after payments of interest and fees, 100 percent of remaining collections from the securitization trusts’ residual assets will be paid to the lender in respect of principal, and any amounts remaining thereafter will be distributed as set forth in the Residual Loan Agreement.

Triad Financial stated that it is in negotiations to gain new facilities to provide alternative funding.

“The company entered into a $49.5 million unsecured promissory note with one of its indirect equity holders, Hunter’s Glen/Ford Ltd. To provide interim funding on May 11, 2008,” the SEC report said.

In other news, the filing indicated, “The company and Residual LLC are also in negotiations to enter into a new residual facility with Hunter’s Glen/Ford Ltd. And GTCR Golder Rauner II, LLC, two of the company’s indirect equity holders, to provide funding to replace this promissory note. This new residual facility will be secured by a second priority security interest in the securitization trusts’ residual assets pledged under the Residual Loan Agreement. Once the Residual Loan Agreement is paid in full, the new residual facility will have a first priority security interest in the securitization trusts’ residual assets.”

Triad also reported its latest quarterly financial results for the period ending March 31. The company’s net income came in at $0.9 million, compared with $8.9 million for the same time frame of 2007.

“The decrease in net income was primarily due to a decline in other revenues (expenses) and lower net interest margin, partially offset by a lower provision for credit losses,” officials stated.

“Our results included $15 million and $0.8 million in losses on our derivative financial instruments for the three months ended March 31, 2008 and 2007, respectively,” they continued.

Average-owned receivables were down by 7.7 percent for the quarter, compared to last year. Executives attributed this to a lower level of originations, along with repayments and charge-offs as the portfolio ages.

“We purchased and originated $249.6 million of auto contracts during the three months ended March 31, 2008, as compared to $304 million during the three months ended March 31, 2007,” officials wrote.

Overall, the company said, “This decrease in originations was primarily due to lower levels of originations in both our direct and dealer channels. In response to higher than expected losses on receivables originated during 2006, we modified our contract origination strategy to better manage our credit risk, which resulted in lower volume levels during the last quarter of 2006 and throughout 2007.”

In another move, officials said, “Additionally, in response to problems currently being experienced in the asset-backed securitization market for non-prime loan originations, the company further tightened its underwriting criteria and increased pricing during the first quarter of 2008, which resulted in lower volume levels during the first quarter. We have also reduced the number of dealers we buy contracts from and have ceased accepting online applications from some direct lending sources.”

The median new contract size came in at $17,945, down a bit from $18,476 in the previous year.

Looking further at the credit markets, the company reported that as of March 31, the cumulative net loss ratio for Triad’s 2006-B and 2006-C trusts each exceeded one of their target ratios. This means that “the credit enhancement requirement to maintain cash reserves as a percentage of the portfolio immediately increased from 2 percent to 3 percent, resulting in a delay in cash distributions to the company. This requirement will remain at 3 percent until the trusts are back in compliance with their targets for three consecutive months.”

Given the current economy, Triad said it could lead one or more of its ratios to surpass targeted levels, causing stress on the company’s liquidity position.

“If that occurred, we could be required to significantly decrease contract origination activities and implement other significant expense reductions if securitization distributions to us are materially decreased for a prolonged period of time,” the report stated.

“The past several months have seen unprecedented turmoil in the global credit markets in general, and the asset-backed securitization markets in particular,” the document continued. “The well-publicized problems involving credit insurance providers may also have an impact on our ability to execute securitizations.

“Recently, AMBAC Inc., which has provided credit enhancement insurance on three of our securitization transactions since May 2005, announced that it would not provide such insurance on automobile securitizations in the future. Those companies that continue to provide credit enhancement insurance may be less likely to do so at the rates and on the terms at which prior transactions were executed in 2006 and early 2007,” executives explained.

Continuing on, the SEC filing said, “We believe that we will continue to require the execution of securitization transactions, along with borrowings under our warehouse and residual facilities in order to fund our future liquidity needs.”

Triad indicated that it can make “no assurance that funding will be available to us through these sources or, if available, that it will be on terms acceptable to us. If these sources of funding are unavailable to us on a regular basis, we may be required to further decrease contract origination activities and implement additional expense reductions, all of which may have a material adverse affect on our ability to achieve our business and financial objectives.”

On a positive note, in late May, AmeriCredit announced a $750 million asset-backed securitization under its automobile receivables trust, which mostly covers subprime auto loans. So perhaps the reins on the credit market are loosening a bit, which could mean good news for Triad down the road.

NEW YORK — GMAC Financial Services confirmed today that it is in discussions with federal regulatory authorities seeking bank holding company status under the Bank Holding Company Act of 1956, among other things.

As a bank holding company, GMAC explained that it would obtain increased flexibility and stability to fulfill its core mission of providing auto and mortgage financing to consumers and businesses.

The lender indicated that it also expects to have expanded opportunities for funding and for access to capital as a bank holding company.

In connection with this initiative, GMAC said it is considering raising and maintaining significant amounts of additional capital to meet regulatory requirements related to bank holding company status.

In this regard, GMAC reported that it intends to commence a private offer to exchange a significant amount of its outstanding indebtedness for a reduced principal amount of new indebtedness.

Details of this offering will be disclosed in the near future.

Offering a cautionary statement, GMAC officials said they cannot assure that the company will become a bank holding company, that it will undertake the private exchange offer, or that if undertaken, that such private exchange offer will be completed or if completed, whether it will achieve a sufficient amount of capital to satisfy the applicable capital adequacy requirements.

“The benefits of this type of restructuring would allow us to put additional capital and liquidity resources immediately to work in financing consumers and automotive dealers,” explained Alvaro de Molina, GMAC chief executive officer.

GMAC Halts Auto Originations in Some Countries

In other news this week, GMAC announced adjustments to its European auto finance business as part of a strategic approach to manage resources during this time of significant capital and credit market disruption.

The actions include ceasing retail originations in Czech Republic, Finland, Greece, Norway, Portugal, Slovak Republic and Spain, effective Nov. 1.

In these markets as well as in Hungary and Denmark, officials said they will assess the implications of this challenging environment with the aim of diversifying funding sources for dealers over time.

GMAC said it will also implement a more conservative pricing policy throughout its European markets to more closely align lending activity with the current capital markets.

Masterlease, GMAC’s global full-service leasing business will not be affected by these changes, executives noted.