California Republic Bancorp (fka CRPB)

[Enterprising Investor]

Lenders Rev Their Engines (11/23/12)

SHARON TERLEP and CHRISTOPHER BJORK

The booming market for auto lending is causing deal makers to kick into high gear.

General Motors Co. on Wednesday said that it would buy the international operations owned by Ally Financial Inc. as part of a push to build up an auto-loan business after abandoning it six years ago. Spanish lender Banco Santander SA is planning to take its U.S. consumer-finance unit public in a deal that could value it at $6 billion, people familiar with the effort said.

The two deals are among the biggest of a flurry of transactions over the past few months as investors, companies and banks try to take advantage of a surge in demand for auto loans from consumers.

The business is particularly attractive because car sales are on the rise after years of decline. Auto loans are considered relatively safe compared with other loans. Consumers are seen as more likely to default on credit-card debt and even a mortgage before car loans. And delinquencies are near record lows.

That all helps make car lending more profitable than other types of loans.

Banks "are able to operate these businesses as extremely profitable businesses," said Brian Wiele, head of syndicate for Barclays's securitization business in the Americas, which packages loans into bonds to sell to investors.

For car makers like GM, owning a financing business is particularly attractive because it removes their reliance on outside sources to provide loans to customers. In 2006, GM, struggling under the weight of a ballooning debt burden, shed its finance arm to help protect the unit's investment-grade credit ratings.

But in recent years, the auto maker has sought to get back into the business, including an unsuccessful bid in 2010 to buy Ally's U.S. auto dealer finance business for $5 billion.

General Motors said Wednesday that it agreed to buy Ally operations in Europe and Latin American, along with a 40% stake in a Chinese joint venture, in a $4.2 billion deal, GM's biggest in years. It also is building out its own U.S. lending business, according to people familiar with the plans. Ally also recently agreed to sell operations in Mexico and Canada.

Private-equity firms also are getting in on the action.

This month, buyout shop Parthenon Capital Partners said it would acquire White River Capital Inc. and its subprime auto lender, Coastal Credit, for $79.5 million. And a company controlled by buyout firm Aquiline Capital Partners LLC last month closed on a purchase of subprime lender First Investors Financial Services Group Inc. for $100 million.

And some big commercial banks, including Wells Fargo & Co. and Capital One Financial Corp., have a bigger share of the market, according to credit-reporting firm Experian.

Santander is betting that its fast-expanding business, which offers loans through more than 13,000 car dealers across the U.S., will attract big demand from investors, enabling the bank to weather the economic crisis in Spain, according to people involved in the effort.

Last year, Santander sold a 25% stake to buyout firms KKR , Warburg Pincus LLC and Centerbridge Partners LP in a deal that valued Santander Consumer USA at $4 billion. The bank still owns 65% of the consumer-finance unit.

Auto lending was the fastest-expanding segment of consumer debt in the second quarter, according to the Federal Reserve Bank of New York. U.S. consumers had $750 billion in outstanding auto loans in the second quarter, an increase of $13 billion, or 1.7%, from the previous quarter. Student-loan debt was at $914 billion, up 1.1%. Meanwhile, credit-card balances hit their lowest level in 10 years.

Particularly in demand are those loans extended to buyers with subpar credit, which command a higher interest rate. These subprime auto loans are nearing prerecession levels, according to Experian, as lenders see the draw as outweighing the risk.

Some industry watchers worry the competition will drive lenders to extend credit to consumers who can't afford it or drop rates too low, leading to higher losses in the future. The interest from private-equity firms that are funding some of the newer finance companies could also drive risky behavior, Standard & Poor's analyst Amy Martin wrote in a research note.

"We're reminded of the industry's first 'boom' period in 1994 to early 1997, which was followed by a severe contraction," she said of subprime lending.

For now, delinquencies aren't so much of an issue. Loans past due for 30 or 60 days dropped 15% in the second quarter from a year earlier, according to Experian.

Meanwhile, auto loans are a big driver behind the surge in U.S. asset-backed securities, which are on track to record their strongest year since at least 2005. These are bonds backed by assets other than real estate or mortgages.

Smaller lenders, including those owned by auto companies, are using asset-backed offerings to raise funds. In one week this fall, subprime auto lenders Consumer Portfolio Services Inc., Credit Acceptance Corp. and Exeter Finance Corp. sold $7 billion in asset-backed securities, helping make 2012 the largest issuance year for auto-related asset-backed securities since 2005, according to Barclays. Securities backed by auto assets are the main driver of growth in nonmortgage asset-backed securities, with $93.7 billion so far this year, compared with $65.8 billion in all of 2011.

http://professional.wsj.com/article/SB10001424127887324712504578135090642267124.html