Santander Consumer Gains After Auto-Lender’s IPO

Santander Consumer USA Holdings Inc., the U.S. auto-lending unit of the Spanish bank, climbed in its trading debut after raising about $1.8 billion in an initial public offering.

The shares rose 5 percent to $25.20 as of 4 p.m. in New York, after the company, whose shareholders include KKR & Co. and Banco Santander SA, priced the shares in its IPO at $24 each. Santander Consumer increased both the number of shares and the price range yesterday before the offering. The stock is listed on the New York Stock Exchange under the ticker SC.

Santander Consumer is the latest consumer-finance company to tap public markets as investors warm up to businesses that bundle loans for everything from cars to mortgages. The Dallas-based company will profit from a surge in auto sales as less credit-worthy borrowers return to the car market, said Robert Dodd, an analyst with Raymond James & Associates Inc. U.S. auto sales rose for a fourth straight year in 2013, according to researcher Autodata Corp.

Founded in 1995, Santander Consumer originates auto loans through car dealerships, manufacturers, banks and its direct-to-consumers website Subprime loans, which have both higher yields and increased default rates, make up more than 80 percent of Santander Consumer’s loans.

Subprime Borrowers

The market for subprime borrowers, especially among auto lenders, has made a strong comeback over the past year. Total sales of securities linked to subprime car loans surged 24.4 percent to $14.7 billion as of August when compared to a year earlier, according to Deutsche Bank AG.

Many of the larger firms have stepped back into the subprime auto lending market to take advantage of the higher profit margins, said Jody Lurie, a corporate credit analyst with Janney Montgomery Scott LLC in Philadelphia.

“A lot of the large banks have gone into auto financing as another avenue for growth because it’s attractive from the standpoint of rebirth,” said Lurie.

Santander Consumer plans to expand its portfolio of prime loans through partnerships with automakers, according to the IPO prospectus. The company recently paid Chrysler Group LLC $150 million to be the preferred provider of the automaker’s loans over the next 10 years under the brand Chrysler Capital. Santander Consumer sees its addition of prime lending as a way to further increase its share in subprime, said Chief Executive Officer Thomas Dundon in a phone interview with Bloomberg.

At $26 a share, Dundon, who holds about 14 percent of total shares after the IPO, would have a net worth of about $1.4 billion, according to the Bloomberg Billionaires Index.

Santander’s Gain

Banco Santander had a net gain of 740 million euros ($1 billion) by selling a 4 percent stake the IPO, according to a regulatory filing. Santander intends to increase the equity of Santander Holdings USA, which groups the Santander Bank NA and Santander Consumer units, by as much as $2 billion to support U.S. growth plans, it said in separate e-mailed statement.

The risk level for auto loans tends to be lower than other pricier consumer-finance products, such as mortgages. Loan payments are lower and people typically prioritize car payments since they need it day-to-day, according to Lurie, who said that the booming market is still not as healthy as before the crisis despite the growing investor demand.

Banco Santander will own 61 percent of the unit after the sale, Santander Consumer’s prospectus shows. An investment vehicle backed by KKR, Warburg Pincus LLC and Centerbridge Capital Partners LLC will own about 7 percent before the overallotment option is exercised. The funds acquired about a 25 percent stake in 2011, when Banco Santander was offloading assets to bolster its finances.

Buyout Profit

At the time, Banco Santander, Spain’s biggest bank by market capitalization, said the stake sale valued Santander Consumer at $4 billion. At today’s closing price, Santander Consumer has a market value of about $8.75 billion, based on its 347.4 million shares outstanding.

The buyout funds would post a partly realized gain of at least 133 percent on their $1 billion equity investment, IPO filings show, based on the IPO price of $24. That includes about $257 million in cash dividends garnered since the 2011 investment.

Citigroup Inc. and JPMorgan Chase & Co. managed the offering.

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