If you subscribe to the idea that Hurricane Sandy made some impact on the outcome of the election, then you might also want to consider how it will impact the lower reaches of automobile finance.
Early reports indicate that Hurricane Sandy destroyed 250,000 cars. That is a sizable disruption. In fact, some
believe that it is so large that it will reset pricing for cars over the next few months. For businesses that make money when people buy cars, this is a great opportunity. If you cash flow comes after the sale, though, its a problem.
True, most of the people who woke up to a ruined car are going to be able to file a successful insurance claim. For their sake, let's hope that they get those checks in a timely fashion. Unfortunately, most of those checks are going to pay for the cost of getting another vehicle in the condition of the car at the point in time when it was destroyed. Given that cars depreciate, many of those cars are going to bring back a check worth less than the value of the outstanding principal on their car loan. That will be especially true of cars purchased from buy-here pay-here lots. Those cars tend to be sold with higher mark-ups.
I said there will be winners and losers. There will probably be more losers. The insurance companies will have company. For anyone that owns a lot of sub-prime auto debt, this is a bad day, too.
A company like Consumer Portfolio Services ("CPSS") will be challenged to generate the same collection rates on sub-prime car loans now that the collateral is "under water." CPS acquires debt from the banks that want to sell the loans they originally made to individual consumers. During their Q3 2012 investor presentation, CPSS reported that it had a $845 million portfolio of car loans yielding 23.2 percent to borrowers with a mean credit score of 561. The company estimates that the average loan-to-value is 114 percent. CPS' charge-off rate has dropped in half since the end of 2010 - a number that should say something positive about how the economy is working for low-to-moderate income households - but it could go back the other way.
It might be possible that White River Capital, another sub-prime auto finance company, will escape. More than half of RVR's debt is from loans made to service members. Like Credit Acceptance, it works not with individuals but instead with dealers. That gives it some protection, as does its geography. It does business in 27 states. With the exception of Virginia, none were in the path of Sandy.
On the other hand, Credit Acceptance ("CACC") would seem to have itself covered against a shock. While CACC is the giant in the Buy Here Pay Here finance world, it generates most of its revenue on debt that puts much of its risk back on to the local BHPH dealerships. CACC does not make loans to individuals. They advance to dealers.
Winners? That's easy. Those dealers are going to get extra margin and lots of new sales.