Subprime Auto Lender Consumer Portfolio Seeks New Lease on Life
A shakeout that remade the world of subprime auto lending a few years ago isn’t entirely over. Industry observers say Irvine-based Consumer Portfolio Services Inc. could be either the latest survivor or the last causality.
The company, which makes car loans to people with less than perfect credit, hasn’t been able to repackage and sell loans to Wall Street for the past 18 months. Revenue has nearly evaporated,first-quarter sales plummeted 98% to $374,000, from $20.8 million a year ago. In the past five quarters, the company has amassed $57 million in losses.
To top it off, Consumer Portfolio shares are in the doldrums, going from 18 in 1997 to around a buck today.
That’s in contrast to rivals such as AmeriCredit Corp. of Forth Worth, Texas, or Household International Inc. of Prospect Heights, Ill., which are Wall Street favorites. They’re the survivors of a shakeout in 1997 and 1998 that saw the subprime auto loan market go from a couple dozen players to just a handful of strong ones. Trouble is, Consumer Portfolio is still on the fence.
But remember, this is subprime lending we’re talking about, which helps to explain the continued optimism of Consumer Portfolio Chief Executive Charles Bradley Jr.
“We’re very pleased with all areas of the operation of the company,” Bradley recently told analysts in a conference call. “The fact that we were able to get through 1999 gives us huge opportunities. There is still enormous opportunity out there for the subprime auto sector.”
Bradley is tying to stage a turnaround at Consumer Portfolio. Just a few years ago, the company was a fast-growing auto financier that originated, serviced and repackaged loans as securities for investors. Today the company can do little more than originate loans and turn them over to other finance firms because it doesn’t have enough cash to back the loans.
The cause of the company’s undoing: too many bad loans, even for a company that deals in high-risk lending.
Consumer Portfolio has marked time by originating around $50 million in loans per month through its network of car dealerships. Of that, the company gets a small portion in fees. While that doesn’t provide the cash inflow of selling auto loans as securities, it affords Consumer Portfolio a small, albeit steady, revenue stream.
In March, the company staved off possible bankruptcy when Levine Leichtmen Capital Partners LP of Beverly Hills provided a $16 million infusion.
New Securitizations Needed
But if Consumer Portfolio hopes to be anything more than just a tiny middleman, it needs to start selling loans to Wall Street again.
“We’ll do securitizations again,” Bradley said. “It’s hard to predict when.”
That’s the tricky part. The company hasn’t been able to securitize any loans since late 1998. That year, the company reported that 13 of its 22 pools of insured securities had reached cumulative loss levels, triggering a requirement that related spread accounts be maintained at higher levels. That led the company to increase cash deposits to its spread accounts, which are used as insurance against loans that go bad.
“We had no capital,” Bradley said.
Since then, Consumer Portfolio has had to modify its business model to stay alive.
Last November, Consumer Portfolio reached a series of agreements to allow the company to receive releases of excess cash from its securitized portfolio of loans. From June 1998 through September 1999, any excess cash generated from collections on the portfolio was used to build reserves and was not available to CPS.
“We’ve solved all our problems,” Bradley boasted. “The company is in the strongest cash position we’ve been in for at least 18 months if not longer.”
Seeking Credit
Not all of the company’s problems are solved, though.
Consumer Portfolio still doesn’t have a line of credit,the next step its needs before it can start securitizing loans again. As it is now, the company doesn’t have credit or enough cash to hold onto the loans it originates. So it turns around and sells those loans to lenders, settling for transaction fees rather than the big revenue of a securitization.
Consumer Portfolio’s net cash provided by operating activities for 1999 was $170,000, down from $71.1 million in 1998 and $26.1 million in 1997.
Staying in the Game
Industry players aren’t writing off Consumer Portfolio just yet. Despite the company’s current state, Consumer Portfolio could re-emerge as a player in subprime auto lending. But they concede the company has big challenges ahead.
For his part, Bradley said Consumer Portfolio is staying in the game by doing loans, even if the company can’t sell them to investors. Originations keep Consumer Portfolio’s operations running and help the company maintain the ties it has to its 2,000 auto dealers, he said.
“That does wonders for giving us some income currently,” Bradley said. “But probably more importantly, it does a great job of keeping the origination infrastructure in place n
Bradley & Son:Family Businessmen
Charles Bradley took the helm at Consumer Portfolio in 1992 seven months after his father, Charles Bradley Sr., founded the company. The Bradleys are involved with various businesses in Orange County and elsewhere.
The pair runs Stanwich Partners Inc., a Connecticut investment firm. In 1996, Bradley Sr., purchased a 38% stake in NAB Asset Corp., a subprime mortgage lender in Irvine. It was also the same year the father-son team bought CARSUSA, a Mitsubishi car dealership in Long Beach.
Bradley Sr. is the chairman and chief executive of DeVlieg-Bullard Inc., a Huntington Beach-based maker of woodworking and metalworking machine tools. The company filed for Chapter 11 bankruptcy protection last July.
Bradley Sr. also is a director of Texon Energy Corp., an oil and gas property development company in Las Vegas, and a director of Sanitas Service Corp., Bethany, Conn. He is president and chief executive of Reunion Industries Inc., a plastics maker in Pittsburgh.
Bradley Jr. is the chairman of LINC Acceptance Corp, Norwalk, Conn., an auto loan servicing company that ceased its operations in the second quarter of 1999. In October, three former LINC employees filed an involuntary petition for LINC’s liquidation under Chapter 7 of the bankruptcy code.
