Consumer Finance Finds Comeback From Credit Crisis With IPOsLeslie Picker
Five years ago Springleaf Holdings Inc. was losing more than $1 billion annually as the financial crisis crippled its business of lending to people with poor credit. Fighting off bankruptcy, it closed more than 200 branches and laid off about 800 employees in 2012.
Today Springleaf is profitable and publicly traded. Its stock was up 51 percent through yesterday since its initial offering on Oct. 15, increasing its market value by $1 billion.
The Evansville, Indiana-based Springleaf is among dozens of consumer-finance companies that, given up for dead during the recession, are now finding new life going public. The resurrection reflects how investors have warmed up again to businesses that bundle loans for everything from cars to mortgages into securities that are bought by institutions.
While this practice of securitization helped lead to the financial crisis when many subprime loans within the asset-backed bonds turned out to be worthless, investors are taking another look at these companies. Last year, 48 consumer-finance firms raised more than $10 billion in IPOs, the most since before the crisis, data compiled by Bloomberg show.
“It’s a different environment,” said Tom Brown, chief executive officer of hedge fund Second Curve Capital LLC, citing an increase in consumer borrowing. “It’s tough after you’ve been burned as badly as we were to get back on that horse, but we think it’s the right thing to do. So far, it’s been rewarding.” Second Curve owns shares of Springleaf.
The IPO trend is continuing in 2014. Subprime auto lender Santander Consumer USA Holdings Inc. rose as much as 10 percent today after raising $1.8 billion in its offering yesterday.
“Amid the economic recovery and normalizing credit conditions, the specialty finance industry has successfully emerged from the financial crisis,” said Philip Drury, co-head of equity capital markets for the Americas at Citigroup Inc., which managed the Springleaf and Santander Consumer IPOs. “We expect an abundance of IPOs in the sector in 2014.”
While lenders have tightened underwriting standards since the recession, the revival of securitized subprime loans could lead to trouble again, said Jeff Davis, managing director for the financial-institutions group at advisory firm Mercer Capital in Nashville, Tennessee.
“We’re starting to see slippage,” Davis said. “Are the seeds for the next credit crisis being sown? Only to the extent loose lending continues for years and it gets looser.”
Auto loans are a particular worry, said Fitch Ratings Ltd. in a December report. Looking to expand market share, lenders are expected to compete vigorously for subprime borrowers in 2014, which may lead them to make loans to people with weaker credit scores, Fitch said.
Consumer lending companies now are benefiting from higher loan demand and renewed institutional confidence in purchasing asset-backed securities. Non-mortgage consumer credit reached nearly $2.75 trillion in 2013, the highest since before the crisis, according to a December report by Moody’s Analytics. Auto loans increased 10 percent in 2013 from the year before, the data show.
The volume of worldwide securitization grew from almost nothing in late 2008 and early 2009 to more than $600 billion in 2013, according to data compiled by industry newsletter Asset-Backed Alert.
Last year “was the turning point for specialty finance because the market seems more convinced we’re in the midst of a turnaround,” said Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods Inc. “The debt capital markets are probably working as efficiently and fluidly as they have in the last few years.”
Santander Consumer USA, the U.S. consumer lender subsidiary of Banco Santander SA, raised $1.8 billion yesterday after it increased both the amount of shares it offered and the price range -- an indication of strong investor demand. It was the fifth-largest U.S. IPO of a consumer-finance company, data compiled by Bloomberg show. Spain’s biggest bank owns a 65 percent stake in the Dallas-based company, which has a market valuation of $8.3 billion, based on the IPO price.
Santander Consumer USA was valued at a discount relative to its publicly traded peer, Credit Acceptance Corp. At the $24 IPO price, Santander Consumer would trade at 11.8 times earnings for the 12 months through September, compared with 12.9 times earnings over the same period at Credit Acceptance, data compiled by Bloomberg show.
Net income at Santander Consumer has soared since the recession’s start, to $582 million in the first nine months of 2013 from $174 million for all of 2008, the company’s IPO prospectus shows.
Eighty-three percent of its auto borrowers were in the subprime category as of Sept. 30, according to the prospectus. The company is dependent on its ability to sell asset-backed securities, a market that “experienced unprecedented disruptions during the recent economic downturn,” Santander Consumer said in its IPO filing.
Consumer-finance firms aren’t the only beneficiary of investor confidence. A total of $56 billion was raised last year in all U.S. IPOs, the most since 2007, according to data compiled by Bloomberg, as stock market gains lifted benchmarks to records.
Springleaf, which makes personal loans for auto repairs and home improvements, was reeling from the recession when private-equity firm Fortress Investment Group LLC bought an 80 percent stake in 2010. In the next two years it lost a combined $443 million, according to its IPO filing with the U.S. Securities and Exchange Commission.
In 2012, New York-based Fortress restructured Springleaf, including ceasing real estate lending, filings show. Last year the firm finally turned profitable, earning $44.9 million in net income through June 30.
By the time of its October IPO, investors were enthusiastic, pushing Springleaf’s pricing to the high end of its marketed range. The company’s valuation soared from about $2 billion following its IPO to nearly $3 billion now. Fortress retained about 78 percent of the company.
Springleaf declined to comment.
JGWPT Holdings Inc., the firm that offers cash for settlements under the J.G. Wentworth brand, went public in November, four years after it filed for bankruptcy protection. The Radnor, Pennsylvania-based firm had been unable to find buyers for its asset-backed securities in the midst of the financial crisis.
Majority owner JLL Partners Inc. emerged from the IPO with more than a 300 percent paper gain, a person familiar with the matter said at the time. The stock jumped 24 percent through yesterday since its Nov. 8 IPO.
“As we get further and further away from the financial crisis, I think that’s helpful,” said David Miller, chairman and chief executive officer of JGWPT. “As we demonstrate the strength of the business model, that’s helpful. As we rebuilt the balance sheet, that’s been really helpful.”
Not all these lenders have flourished after their IPOs. PennyMac Financial Services Inc., the residential mortgage company founded by former Countrywide Financial Corp. President Stanford L. Kurland, raised $230 million in an IPO last May. Since then its stock has declined by 2.3 percent, as mortgage originators have seen their earnings come under pressure with increased competition from newcomers.
More IPOs in consumer lending are expected this year. To shrink its financial arm, General Electric Co. intends to spin off a unit that makes store credit cards for retailers from Amazon.com Inc. to Wal-Mart Stores Inc. An IPO registration statement will be filed next quarter, and the transaction completed later in 2014, Fairfield, Connecticut-based GE said in a filing last year.
Even as market conditions remain robust, future IPOs are vulnerable to such variables as a change in Federal Reserve interest-rate policy or a macroeconomic shock, said Mercer Capital’s Davis.
“Specialty finance businesses are making a lot of money today and the IPO markets are wide open,” he said. “So you have to seize the opportunity. It won’t always be like this.’