Wednesday, Jan. 23, 2008, 07:00 PM UPDATED 11:59 AMBy Nick Zulovich
FORT WORTH, Texas — Higher-than-anticipated credit losses in AmeriCredit's subprime and near-prime portfolios, compounded by weaker recovery rates, are leading the company to trim dealer relationships, tighten lending requirements, reduce expected originations and cut staffing.
Basically, the company is reevaluating its business and making changes to weather the economic storm after recording a net loss of $19.1 million for its second quarter. However, officials said with the changes in place, AmeriCredit should remain a viable company.
"The December quarter was challenging on many fronts — our portfolio exhibited weak credit performance and uncertainty continues to linger in the capital market," explained Dan Berce, president and chief executive officer, earlier this week in the company's conference call.
"With this backdrop, we are taking steps to strengthen our balance sheet and conserve liquidity," he continued. "We have increased our allowance for loan losses and have implemented a plan to moderate our cash usage by reducing new-loan originations."
Overall, he indicated that all of AmeriCredit's key performance metrics declined more than what is seasonally expected during the December quarter.
"While our specialty prime Bay View portfolio continues to perform in-line with our expectations, we experienced higher than expected credit losses in our subprime and near-prime portfolios," Berce said. "Credit deterioration occurred during the first two months of the quarter and accelerated in December."
Net credit losses came in at 6.9 percent for the second quarter. However, if Long Beach is excluded, the net losses jumped to 7.3 percent from 5.8 percent in the prior year. The company noted that net credit losses were 5.4 percent in the September quarter.
As for delinquencies, those 31 to 60 days late reached 6.8 percent for the quarter, up from 5.5 percent in the previous quarter. If Long Beach is excluded, this delinquency rate would reach 7 percent, compared with 6.7 percent in the prior year.
Looking at accounts greater than 60 days delinquent, the company said this rate was 3 percent, compared with 2.6 percent in the September quarter. If Long Beach is excluded, the rate would be 3.2 percent, compared with 2.6 percent in the previous fiscal year.
"We continue to believe that there is minimal additional frequency risk related to the expansion of average loan terms to 72 months," Berce said. "Loans with higher LTVs carry higher potential losses and the increased credit risk of these loans was factored into our decision to originate them. These factors that we have seen impacting our credit performance this quarter were not specific to higher LTV or longer term. They were more macroeconomic in nature."
Discussing certain struggling areas of the country, Berce said, "Specifically, regional performance in Florida deteriorated significantly in the December quarter compared to previous quarters. Although we have yet to see material deterioration in homeowner performance relative to non-homeowners in this area, this region has seen significant corrections in the housing market and increases in state level unemployment.
"Certain pockets of the Northeast and southern California have also experienced moderate but notable deterioration in performance," he continued. "Additionally, we have observed a general softness in overall payment rates, which we believe could have been impacted by increased budgetary constraints on our customers."
With dealers more cautious in buying inventory at auctions due to expected lower consumer demand, the company's recovery rates were also down more than seasonally anticipated.
The company also said it has completed the transfer of its Long Beach portfolio servicing from Orange, Calif., to the Arlington, Texas, Operation Center.
"This transition was completed yesterday (Monday). We experienced a negative impact related to our integration activities during the December quarter, but expect the adverse affect on credit results will dissipate gradually over the next several months," Berce explained.
Looking to the future, Berce went on to say that for the rest of the fiscal year, the company is forecasting that seasonal improvement in loss frequency will be offset somewhat by the further deterioration in used-car prices at auction.
"As a result, we expect net credit losses to show some improvement in the March quarter and more significant improvement seasonally in the June quarter," he stated.
Chris Choate, chief financial officer, then delved into some further details.
"We recorded a $19.1 million net loss for the quarter," he reiterated. "This loss resulted primarily from an increase in our provision for loan losses. Our provision for loan losses of $357 million covered actual losses realized during the quarter of $286 million, and a $71 million increase in the allowance for loan losses to 5.6 percent of ending receivables as of Dec. 31.
"Provision for loan losses for the quarter was 8.6 percent of average receivables, compared to 5.6 percent a year ago," Choate added. "Provision for loan losses was $245 million, or 6 percent of average receivables in the September quarter. The increase reflects our expectations that credit losses for the fiscal year will come in between 5.7 percent and 6.2 percent, which is 120 basis points above our previous guidance."
As for liquidity, Choate indicated that the company had $567 million as of Dec. 31 in unrestricted cash, which is down from $637 million as of Sept. 30.
"The decrease in cash primarily resulted from the funding of $45 million of lease originations in the December quarter and the fact that we did not draw $30 million of unborrowed capacity on our warehouse lines based on available collateral at year-end," he explained.
"We also have $2.9 billion of available warehouse capacity. As a reminder, our total $5.4 billion in warehouse lines, our two largest subprime warehouse facilities totaling $3.25 billion of credit, will not mature until October 2009. We are in compliance with the warehouse covenants in all our facilities," Choate said.
He went on to say, "Also, we continue to work on a facility to fund our lease originations and expect to have that in place by fiscal year-end. In the meantime, we have substantially slowed lease originations."
Returning to Berce, the CEO reported, "As you can see, we are currently faced with two main issues — weaker credit performance that will impact incoming cash flows and profitability in our business and structural changes in our funding platform, primarily the requirement for higher credit enhancement levels in our securitizations.
"Recognizing these challenges, we are reducing our loan origination target for calendar-year 2008 to $5 billion to $6 billion. This translates into loan origination plans for fiscal-year 2008 of $6.5 billion to $7 billion," he continued.
Touching on Canada, Berce said the company will continue a presence in that country, but will be reducing volume from AmeriCredit's leasing and direct-lending platforms.
Explaining AmeriCredit's game plan going forward, Berce said, "We will accomplish our volume reduction through a combination of credit tightening, reduction in the number of dealers we do business with and a reduction of our sales force. We will also consider competitive and regional performance metrics in each geographical area in assessing our appetite in different markets. Relative to our dealers, we will evaluate each relationship based on efficiency, credit performance and profitability."
Continuing on, he stated, "Over the next several months, we will bring our origination staffing levels and branch count into alignment with our revised origination target. This realignment will include changes that result from the continued integration of Long Beach Acceptance, as well as other staffing reductions deemed necessary to meet the needs of our new target.
"Finally, we expect a small amount of staff reductions within our general and administrative functions," he said. "We will continue to evaluate our cost structures and look for ways to achieve operating leverage despite lower origination levels and a declining portfolio balance in the near future."
Company officials made it clear that they expect their outlined changes to work; however, Berce did say, "On the other hand, if the capital markets continue to deteriorate or if economic factors drive even weaker credit performance, we will have to further revise the scale of our operations."
Providing future guidance, AmeriCredit said it expects fiscal-year net income to come in at $170 million to $195 million.
"We will take a restructuring charge of approximately $10 million over the next two quarters," Berce concluded.