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AmeriCredit's Latest News Doesn't Bode Well for Subprime
For the past year the challenges of AmeriCredit have been widely known. Due to the extremely tight capital market their ability to raise capital to fund ongoing originations have been challenging at very best. As recently as 2007 they were generating roughly $9B in new business each year. Today, they have shrunk to perhaps 20% of that.
Add in the fact that due to rising unemployment and underemployment, collections have deteriorated significantly. This is something to be expected and happens with every economic downturn. The problem is, when you have loan covenants that cap your acceptable losses, and, at the same time sales decrease while losses increase the end results can be disastrous. Such is the predicament the team at AmeriCredit is facing today.
I took it as a portal to the future when talented co-COO Mark Floyd announced last fall he would be leaving at year's end. I have high regards for Mark, and he had guided AmeriCredit through some very tough times back in late 2002 and throughout 2003. Perhaps he didn't want to have to go through the experience yet again. Or he could have seen the handwriting on the wall.
In any case, BNET reported today in an ARTICLE posted online that AmeriCredit "said it had breached the net charge-off covenant on its master warehouse facility above the ceiling limit of 8.5 percent for its six-month average default rate." Again, not a surprise.
As reported by BNET, unless they are able obtain a waiver of restrictive covenants, its warehouse line providers could declare an event of default, forcing accelerated debt repayments, removing AmeriCredit as a loan originator, and/or a cross default in other indebtedness, including about $750 million of unsecured corporate debt-effectively putting AmeriCredit out of business.
I dare say this is not something anyone wants to see occur, even AmeriCredits competitors as it could stand to make badly needed capital many finance companies are starving for even more difficult to obtain. Keep you fingers crossed, and hopefully this doesn't spell the end for AmeriCredit.
Add in the fact that due to rising unemployment and underemployment, collections have deteriorated significantly. This is something to be expected and happens with every economic downturn. The problem is, when you have loan covenants that cap your acceptable losses, and, at the same time sales decrease while losses increase the end results can be disastrous. Such is the predicament the team at AmeriCredit is facing today.
I took it as a portal to the future when talented co-COO Mark Floyd announced last fall he would be leaving at year's end. I have high regards for Mark, and he had guided AmeriCredit through some very tough times back in late 2002 and throughout 2003. Perhaps he didn't want to have to go through the experience yet again. Or he could have seen the handwriting on the wall.
In any case, BNET reported today in an ARTICLE posted online that AmeriCredit "said it had breached the net charge-off covenant on its master warehouse facility above the ceiling limit of 8.5 percent for its six-month average default rate." Again, not a surprise.
As reported by BNET, unless they are able obtain a waiver of restrictive covenants, its warehouse line providers could declare an event of default, forcing accelerated debt repayments, removing AmeriCredit as a loan originator, and/or a cross default in other indebtedness, including about $750 million of unsecured corporate debt-effectively putting AmeriCredit out of business.
I dare say this is not something anyone wants to see occur, even AmeriCredits competitors as it could stand to make badly needed capital many finance companies are starving for even more difficult to obtain. Keep you fingers crossed, and hopefully this doesn't spell the end for AmeriCredit.
Comment
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Comment by Richard Snyder on February 17, 2009 at 1:04pm -
The sub prime lenders are not reacting to tax time! The Down payments are higher and the customers are paying more on monthly or weekly payments. The lenders though have not looked at this and set up new guide lines to lend. This is not good and could extend long into 2009, be prepared to find lenders or keep you relationships very strong with current lenders.
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Comment by Tom Herald on February 15, 2009 at 12:55pm -
Some good news right now is we are seeing down payments the highest I can remember in the past fifteen years.
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Comment by Joe Pate on February 14, 2009 at 1:57pm -
No doubt the subprime market ihas tightened up. However, it's tax time. People have money to spend. Lenders are not advancing as much money......it's time to CAPITALIZE.
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Comment by Pete Kelley on February 14, 2009 at 12:53pm -
The markets for securitizing this paper have certainly been a big contributor in the recent changes in how non prime lenders buy. Greg mentioned the unemployment and underemplyment is also a contributing factor. The fact is that we have experienced a "bubble" similar to that of the mortgage industry. Much like the extoic mortgage programs that are no longer in that industry, the days of many approvals on subprime customers with little money down or high LTV deal structures are over.
Brett is right. There are lenders loaning money. But it is much harder work and a dealerr has to refocus on inventory and sales skills in order to get the necessary down payments.
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Comment by Brett Boatright on February 13, 2009 at 10:19am -
Let's face it, Americredit hasn't bought anything close to what they used to buy in a long time! You can't get caught up in all the lenders that don't buy anymore, you have to find ones that do! If you are depending on Americredit or CPS to pull you through these times you're not going to like what happens. There are lenders out there buying subprime, you just have to work harder structuring your deal! The days of clicking to all the banks to get the best payment call are over! You might have to structure the same deal 6 different ways for 6 different lenders to get your best call, so you better know all your lender guidelines. Don't get caught up in all the negatives going on right now, keep a positive attitude and push forward, you'll be much better off when we get through this! Regional Acceptance is a very good lender and I would recomend them to anyone doing subprime, especially if you get paid on the backend! Drive Financial - Don't get caught up in the fees, buy the right inventory and structure your deal accordingly!, Chase Custom - Get to know your buyer and understand everything they buy, structure/vehicle is everything! Regional Acceptance - Let them take a look at almost everything! They run all apps through a system (Lexus Nexus) and if the system likes the whole deal they buy it!
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Comment by Dave Schultz on February 13, 2009 at 1:40am -
February 2009. Are any of you looking for a stable and consistent sub-prime lender that has been in business since 1978? Check out Regional Acceptance. We are a subsidiary of BB&T Bank. www.regionalacceptance.com or call me direct at 847 204-3137, Dave Schultz, Vice President - Branch Manager (IL, WI, MN)
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Comment by Courtney Cole on February 12, 2009 at 10:53pm -
Ever since October, it seems there has been a "soap opera story" every week! After awhile one tends to get numb to all the "news". I like the song, "I Will Survive", Joe's comment below, and someone on FB last night said, "I will not participate in this economy." Attitude is everything in this market!
The Pittsburgh Steelers did not get very rattled when Arizona scored with very little time left in the Super Bowl. It's kind of like, "we've been here before and we are going to take care of business."
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Comment by Tom Herald on February 12, 2009 at 5:28pm
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too funny and well said Joe. sorta like looking at the water hazard on a golf course
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Comment by Joe Pate on February 12, 2009 at 5:08pm
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pie = 3.14!...you guys disect the americredit problem while i'm delivering cars, ok?
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Comment by Gayle P. on February 12, 2009 at 4:04pm -
I guess this answers my question about AmeriCredit...
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