Carfinco Trades at Record on U.S. Loans Growth

Carfinco Financial Group Inc., the Canadian car lender trading close to a record high, plans to increase its U.S. loan portfolio by 20 percent next year by targeting high-risk borrowers who have filed for bankruptcy or missed credit payments.

Carfinco this month bid for Western Funding Inc. in Las Vegas and added Wakefield, Massachusetts-based Persian Acceptance Corp. in September to boost its U.S. loans for consumers with bad credit ratings.

“We believe that making the bid on Western gives us a tremendous platform for potential growth in the United States,” Chief Executive Officer Tracy Graf said in a Nov. 8 telephone interview from Edmonton, Alberta, where the company is based.

Carfinco is tapping into the growing North American car loans market for consumers who can’t borrow from traditional banks. The company charges interest rates that are higher than standard car loans to reflect the higher risk.

Such car buyers account for more than 27 percent of loans for new vehicles in the U.S., the highest proportion since Experian Automotive started tracking the data in 2007. That compares with 25 percent last year and 18 percent in 2009, as lenders pulled back during the recession.

Carfinco, founded in 1997 as a lender for auto-body shops, will have a total of about $80 million in U.S. loans if it is the successful bidder for Western Funding, the auto lender that filed for bankruptcy protection, Graf said. The company plans to expand its U.S. loan programs, which should boost so-called finance receivables by as much as 20 percent in 2014, he said.

Credit History

“The market definitely grew coming out of 2008, 2009 in terms of the amount of people that damaged their credit history,” Graf, 50, said. “There are more people utilizing our service.”

Finance receivables, the outstanding loans owed to Carfinco, rose 4.3 percent to C$195 million ($186.39 million) at the end of the second quarter, from $187.1 million in the first quarter of 2013 and a 20 percent increase from a year earlier, company documents show.

Carfinco rose 15 percent in the 12 months through yesterday compared with a 10 percent gain in the Standard & Poor’s/TSX Composite index. Carfinco rose 1.9 percent to C$11.44 today, close to a record C$11.68, reached in January.

U.S. Growth

Carfinco agreed to buy Persian Acceptance for $9.5 million in cash and stock, according to a Sept. 4 statement. Persian has 362 dealerships who source auto finance contracts in Vermont, New Hampshire, Massachusetts, Connecticut and Maine.

Western Funding has a license to operate in 30 states, including a significant portfolio in Texas and Florida, Graf said. Western Funding started Chapter 11 bankruptcy proceedings on Sept. 4, Carfinco said in a statement. Western Funding could not be reached for comment when contacted Nov. 13.

Carfinco may double its loan portfolio within three years by tapping into the larger U.S. market, Frederik Westra, director of research at Industrial Alliance Securities, said in an Oct. 29 telephone interview from Montreal.

“It’s a market where they’re going to be able to grow quite nicely,” Westra said.

Western Funding could be a significant contributor to Carfinco earnings in 2015 and beyond if the acquisition is successful, he said. The deal will not be complete until the companies reach a stock purchase agreement, a sale process for competing bids is held, and the court signs off on the plan, Carfinco said Nov. 1.

Missed Payments

Fifty-eight percent of Carfinco’s 22,000 Canadian customers have filed for bankruptcy or missed recent car or credit-card payments, and 36 percent don’t have a credit score, Graf said. The average customer is 36, has worked for four years, and takes a C$12,000 loan with a 30 percent interest rate to buy a five-year-old vehicle, Graf said.

Typically car loans at a bank range from 4 percent to 6 percent, with some dealers offering zero interest deals, Tod Chisholm, director of national sales and marketing at Scotia Dealer Advantage, a unit of Bank of Nova Scotia.

Carfinco takes extra precautions with its high-risk borrowers. The company installs a Global Positioning System start-interrupter device so it can prevent a vehicle from starting if the customer doesn’t make loan payments. A GPS tracking system locates the vehicle if it needs to be repossessed and sold.

Carfinco’s return on equity of 41 percent is the highest of its 15 North American peers, according to data compiled by Bloomberg.

‘Superior ROE’

Auto sales are strong and low-interest rates are helping to spur large-ticket purchases, Patrick Ruiz, an analyst with M Capital Partners in Toronto, said in a Oct. 28 telephone interview. Car sales in Canada have risen 3.5 percent this year as of the end of October, according to Carlos Gomes, an economist at Scotiabank.

Four analysts, including Ruiz, recommend buying the stock, according to data compiled by Bloomberg.

“They return superior ROEs, strong margins, and they play in a space that makes other people nervous in terms of their high-interest car loans,” Ruiz said. ROE, or return on equity, is a measure of profitability.

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