In conversation with some experienced consultants to
the sector this month, I asked them where they thought the best
opportunities for expansion could be found within the motor finance
industry.
The answer was simple – subprime.
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I’ve lost count of the number of times
the ‘subprime gap’ has come up in conversation at events and
functions in recent years, but repetition doesn’t do anything to
diminish the truth of the matter.
The subprime motor finance market is
one of the most uncontested areas of demand in the entire credit
industry – even if it is a lot smaller than it used to be (a
commonly quoted figure is £1bn as opposed to £3bn
pre-recession).
It will likely increase in size as we
continue to wade through a thin economic recovery, or indeed a
second recessionary trough. It will fill with customers who have
much more sober attitudes towards repayment and negotiation than
those who swelled the books of subprime lenders prior to 2006.
As a result of the growth of this
market, and the extremely low level of competition that exists
within it, it will continue to deliver excellent returns to those
who participate.
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By GlobalDataWhat’s more, it has been proven to be
survivable in the event of a market-wide rise in default levels, so
long as lenders are careful to take a modern approach to risk, and
never to lend beyond the realisable value of assets upon
disposal.
For proof of all the above, look
across the page to Moneybarn, formerly Duncton Plc.
This
company, which is rapidly transforming itself from a secluded niche
lender into a subprime landmark, seems to have set its sights on
book size equivalence with the Carlyle-Close-Barclays axis of
mid-sized lenders.
If its lending continues to satisfy
the investor it took on board at the end of last year, it seems
very feasible that this could be achieved.
Another comparable success is emerging
from The Funding Corporation and its dealer group sister company,
ACF Car Finance.
Good for Moneybarn and TFC, but will
anyone else get involved in that market? It is important to figure
out how an entry could be achieved.
It is getting pretty late in the day
for entry via acquisition. Most of the subprime lenders that
disappeared in the course of the recession and its aftermath are
now largely wound down or stripped of their infrastructure – unless
I am mistaken, they would offer little to any investor looking to
resurrect them as going concerns.
That said, as was suggested to me
earlier this month, there is perhaps a case for such a company to
be acquired at a heavily discounted price, and the proceeds from
book run-off to be used to fund the startup costs of an entirely
new lender.
This would take some very careful
maths, but would be a potentially sound way for any player to enter
the market.
A more likely option, however, would
be the acquisition of a smaller non-prime finance house by a prime
lender, followed by an injection of capital from the main business
to scale up lending to a more profitable level.
This is a route that would partially
avoid the search for wholesale funding that has proved so difficult
for many smaller lenders in recent years.
Whatever the options for entry into
the subprime market potential investors may be considering, there
is one set of assets remaining from the era of the subprime boom
that remains undiminished and ripe for acquisition: the human
talent involved.
There are many well-known names from
the directorial boards of vanished lenders who are yet to resurface
in the industry. Keeping an eye on who shows up where may be one
reliable way to know if and when a subprime renaissance is on the
horizon.
Fred Crawley
fred.crawley@vrlfinancialnews.com
