For a company that deals in subprime loans, Irvine’s Consumer Portfolio Services Inc. seems to be holding up.
The key indicator: Wall Street’s appetite for auto loans packaged as bonds has eased but hasn’t gone away like it has for subprime mortgages.
This year, Consumer Portfolio expects to sell at least $700 million worth of auto loans as bonds, down from $1 billion last year.
Bond buyers are “more hesitant than they used to be,” said Robert E. Riedl, chief investment officer for Consumer Portfolio.
The company makes auto loans to borrowers with imperfect credit. It funds loans generated by auto dealerships and some sellers of used cars.
Consumer Portfolio not only has had to deal with the subprime meltdown but also a slowdown in auto sales that took hold in 2007 and has continued this year.
Last year, Consumer Portfolio made $1.3 billion in loans. This year it projects to do $700 million to $800 million.
The company’s shares have lost half of their value in the past year, giving Consumer Portfolio a recent market value of $60 million.
By the standards of the decimated subprime lending sector, Consumer Portfolio’s pullback isn’t as severe as those seen at mortgage lenders.
Executives have gone out of their way at investor conferences to distinguish the company from mortgage lenders.
Consumer Portfolio’s borrowers are more likely to try and keep their autos versus a home with a troubled mortgage, they insist.
“People need to get to work,” Riedl said.
And auto loan borrowers aren’t facing the same kind of high payments or rising interest rates as are some mortgage holders with adjustable rate loans that reset to a higher rate after a few years.
But bad loans are rising at Consumer Portfolio, albeit at a slower pace than some rivals.
Defaults on loans made in 2006 and 2007 are up about 10% from those made in 2004 and 2005, according to the company. About 13% of its loans are in default.
Texas-based competitor AmeriCredit Corp. has seen a 40% rise in bad loans. Huntington Beach-based Triad Financial Corp. saw a 20% increase, while Irvine-based United Panam Financial Corp. was up 15%.
To cover losses, Consumer Portfolio puts aside reserves to handle a year’s worth of bad loans. Last year it had $80 million set aside. This year it has $100 million.
Consumer Portfolio gets about 40% of the loan value back from defaults. The average price of the autos it lends on is about $15,000, according to Riedl.
The company has weathered turmoil before.
Founded in 1991, Consumer Portfolio struggled in the late 1990s after the Russian currency crisis sent shockwaves around the world and scared investors away from risky investments.
The company saw its sales of loans dry up in 1999. It survived by making or acquiring loans from dealers and turning them over to other finance firms for a fee.
Consumer Portfolio started selling loans to Wall Street again in 2001.
This year, Riedl said he expects Consumer Portfolio to make at least two bond sales. It’s averaged three to five deals annually for the past few years.
Auto loans continue to get high marks from credit rating agencies, according to Riedl. The math behind the loans is more predictable, he said.
A worry for Consumer Portfolio: trouble in financial markets has led to higher payments on its bonds.
That has Wall Street analysts forecasting the company’s earnings to fall 21% for the first quarter to about $2 million. They expect revenue to rise 20% to about $100 million.
Even with Federal Reserve interest rate cuts, bond buyers, which include FMR Corp.’s Fidelity Investments, are demanding more of a return from Consumer Portfolio.
A year ago, they wanted 20 basis points above the 10-year Treasury benchmark. Now they want 200 basis points above it, Riedl said.
The higher costs are passed onto to auto dealers, which in turn charge their customers more, he said. n
