Buy Here Pay Here Goes Public

Buy Here Pay Here is going public!

Drive Time, a Buy Here Pay Here BHPH chain with 80 dealerships in 13 states, is going to raise $200 million through an initial public offering of stock.Jeffries and Stephens are the lead managers. The IPO says that it will trade under the ticker “DTA.” Read the prospectus that they submitted to the SEC here.

Drive Time sells cars and offers in-house financing through their DT Acceptance Corp. “We’re the nation’s largest auto financing company,” said my prospective dealer. Last year, Drive Time sold more than 40,000 cars and generated more than $29 million in profits. Buyers also get oil changes and other maintenance with their purchase.

Drive Time says that it will use the majority of the money to pay off outstanding debt. DT has about $1 billion in debt.  That includes some high cost subordinated debt:  DT has $38.1 million in subordinated debt outstanding (to Verde and to one of its  with a 22 percent interest rate. The loan is scheduled to increase by 2 percent per year. It has another $24 million in subordinated debt, also with Verde, at 27 percent.

The expectations for auto retailing are improving. With those earnings, it is at least possible to suggest a general value for the shares. CarMax (KMX) is priced at 17 times earnings.  America’s Car Mart (CRMT) is priced at about 12 times earnings.  Asbury Automotive (ABG) goes for about 20 times earnings.  CRMT sells used cars and provides financing, so maybe it is the best comp.

Buy Here Pay Here is a term for a business model that couples car sales with in-house lending.  By controlling the entire four-square, these dealerships earn more money on each sale.  Their target consumer has no money and a sub-560 credit score.

BHPH is all about people down on their luck.  The price of being down on your luck is high.

Drive Time offers its own financing through DT Acceptance Corp. Both are headquartered out of Utah Delaware South Dakota Arizona. One DT customer told me that he got a loan in 2007 to buy a 2001 Ford Taurus.  The Taurus had about 60,000 miles. He paid $12,000 and took a loan at 26.99 percent. It is worth mentioning that this rate was probably not representative of all consumers.  The rates are determined not just by credit score, but also by car type and down payment amount. State usury laws, which cap interest rates, are also a factor.  In North Carolina, for example, loans cannot exceed 36 percent.  It is likely that many customers pay even higher financing rates.

At any price, though, DT derives its advantage because it works with consumers that have few options.

There’s more:  DT has all kinds of special deals. The DT Rate Advantage program that gives a customer the chance to buy down the interest rate.  I spoke to one of their agents.  According to her, it works like this – say you agree to buy a car for $10,000 with a 20 percent interest rate on the loan. A borrower would have a period of time, perhaps 30 days, when they can come back and put down an additional down payment. That triggers a new lower rate.  However, the new contribution does not go against principal.

Clearly, there is a market for this kind of model. People with bad credit have few options.  It also makes a difference to people without a lot of cash when Drive Time offers three free oil changes for each of the first three years after the purchase.  I can imagine why some people would take this offer.

What is interesting is the extent to which the inherent risks in this kind of business will appeal to investors in this market. Many sources of subprime credit have stumbled.  CompuCredit shares traded for over $40 as recently as 2005.  Now they are selling for less than $5. The payday lenders have done a bit better, but they are still off.

One source says that in the most recent downturn, that BHPH is the only sector of the auto business that has enjoyed an increase in business. I can understand how that might be the case. With so many people out of work, and with so many lenders cutting back on credit, it is hard for many people to get auto loans. BHPH has all kinds of ways of working out loans for people who could not qualify for a loan elsewhere. It is a lender of last resort, at a time when fewer people have better options. Will it play on Wall Street?