Pierre Money Mart Blog

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 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 — AmeriCredit recently announced a new member to its board of directors, in addition to retiring $108 million of senior notes due 2015.

Becoming a board director is Bruce Berkowitz, meaning AmeriCredit now has 10 board directors.

Offering a bit more about Berkowitz, officials said he is the president of Fairholme Funds Inc., and is also a member of its board of directors.

He has more than 24 years of investment management experience and is the managing member and chief investment officer of Fairholme Capital Management LLC.

Berkowitz also serves as a director and member of the audit committee of TAL International and White Mountains Insurance Group.

“We are pleased to add such a well-respected and experienced professional to our board of directors. I am certain that our company and our shareholders will benefit greatly from his knowledge and insight,” said Clifton Morris Jr., AmeriCredit’s Chairman

Additionally, in consummation of the transaction announced on Nov. 24, 2008 between AmeriCredit and Fairholme Funds Inc., AmeriCredit indicated that it has issued approximately 15.1 million shares of its common stock to Fairholme, valued at $6.02 per share. This is in exchange for $108 million of par value of AmeriCredit’s 8.50 percent senior notes due 2015.

Apparently, as of June, Manchester Inc. is now known as Navigator Holdings, according to a statement that came out Monday.

The company and its subsidiaries emerged from Chapter 11 bankruptcy protection June 23, 2008.

“Pursuant to the terms of the confirmed Chapter 11 Plan, Manchester’s senior lender, Palm Beach Multi-Strategy Fund, LLC now owns 100 percent of the new stock in the company,” executives said.

“All old common stock of Manchester Inc., formerly MNCS, now MNCSQ, that was outstanding at the time Manchester filed for bankruptcy on Feb. 7, 2008, has been canceled, extinguished and terminated as of June 23, 2008,” they continued.

The company is now privately owned by Palm Beach, meaning the old common stock does not represent equity or any other interest. Therefore the stock has no value and should not be traded, officials highlighted.

They went on to explain that, “The Manchester Chapter 11 Plan embodies a global settlement of all disputes among Manchester, its former directors and officers and Palm Beach. Pursuant to the plan, Palm Beach received all of the equity in the reorganized company in exchange for a cancellation of the debt owing to Palm Beach from Manchester.

“In addition, Palm Beach contributed a total of $3.7 million to be used to pay claims and to fund the operations of a litigation trust, which will pursue claims against third parties and distribute the proceeds to creditors. In exchange, Palm Beach, the debtors and their respective officers and directors exchanged global releases of any and all claims and causes between and among them,” executives indicated.

Navigator has repositioned itself in the independent automobile marketplace as an independent dealer group, providing point of sales financing through its captive finance company.

Navigator is located in Atlanta, and owns and operates eight independent automobile dealerships and a captive finance company called Navigator Acceptance.

The dealerships specialize in selling transportation and utility vehicles and have locations throughout the states of Georgia and Indiana. The company is headed by Robert Lazenby as president. Officials describe Lazenby as a subprime lending and nationally recognized turn-around expert.

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.