Author Topic: LEAP Puts on Sub Prime Auto Lenders  (Read 5677 times)

LongHaul

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #10 on: March 25, 2018, 01:03:15 PM »
I had put this topic aside but came across:
https://www.plainsite.org/realitycheck/creditacceptance.html

I spent some time on the three part series.
They explore many valid points but:
-Don't know anything about the author/group making the research/report, what is the intent, the motives?
-The auto subprime leasing industry is messy and a relatively easy target.
-The muckracking style is hard to differentiate from true investigative work

Any thoughts?

Other than CACC dealing with a possibly dubious warranty company that got bought out, what is the smoking gun or fraud?  I didn't see or detect it from reading the 1st 2 reports. 
This is a friend (not myself) who is a very capable consultant for oil and gas investing. 

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Cigarbutt

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #11 on: March 25, 2018, 06:53:14 PM »
"See used vehicle price chart
https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html

Could mean that prices tank and stay lower than normal. 

I think this cycle has happened a bunch of times as the new subprime autolenders learn about credit risk and get wiped out.   Not an easy industry dealing with a lot of yoyos who you are loaning cars to."

Some additional comments:

-The private indices are quite different among themselves and compared to the BLS numbers.
-The used car index has tracked the new car index quite strongly, but not always.
-Long term, used car prices do not decrease necessarily during recessions (may need recessions and very low inflation).
-The used car market is not homogeneous (some segments prices move up while others go down; the average may mask large differences).

Some buyers just buy cars that they cannot really afford. Then the cars tend to be more recent, larger and relatively more expensive.
However other buyers are simply people who have difficulty getting by. Then the cars tend to be older and less expensive.

Perhaps relevant as used car prices may eventually go down in some segments but, if the credit cycle does turn, used cars may become susbtitutes for new cars and there will continue to be a market for people who need a used car to replace a used car.

Have to remember that, since 2008-9, the age of the car fleet has increased and I suggest that this may not be a choice.
The average age of light vehicles is now about 11,6 years!
https://www.statista.com/statistics/261881/average-age-of-light-vehicles-in-the-united-states/

IMO, when the cycle turns, new car sales will suffer more than auto finance companies and more than used car sales.

« Last Edit: March 25, 2018, 06:56:18 PM by Cigarbutt »

Nell-e

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #12 on: March 26, 2018, 01:30:06 AM »
I remember looking at buying puts for CACC a while ago.  I came across the company when reading a write-up by John Huber.  If you look at insider trades, the owners (Foss family) started massively dumping shares starting from September 2016 at $198/share all the way to December 2017 at $326/share.

Also, something from their 10-K seemed really weird:

"An allowance for credit losses is maintained at an amount that reduces the net asset value (Dealer Loan balance less the allowance) to the value of forecasted future cash flows discounted at the yield established at the time of assignment. This allowance calculation is completed for each individual Dealer. Future cash flows are comprised of estimated future collections on the Consumer Loans, less any estimated Dealer Holdback payments. We write off Dealer Loans once there are no forecasted future cash flows on any of the associated Consumer Loans, which generally occurs 120 months after the last Consumer Loan assignment."

They write off Dealer Loans after 120 months or 10 years?  That sounds ridiculous.  If you recall, the Great Recession started in 2008 and I believe CACC benefited greatly from the "cash for clunkers" program.  Does that mean that Dealer Loans originated in 2008 are going to be written off starting this year?

I've been watching this stock from when the Foss' first started selling and it's gone up by over 50% so I have no idea where the price is heading.

LongHaul

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #13 on: March 26, 2018, 10:38:31 AM »
I remember looking at buying puts for CACC a while ago.  I came across the company when reading a write-up by John Huber.  If you look at insider trades, the owners (Foss family) started massively dumping shares starting from September 2016 at $198/share all the way to December 2017 at $326/share.

Also, something from their 10-K seemed really weird:

"An allowance for credit losses is maintained at an amount that reduces the net asset value (Dealer Loan balance less the allowance) to the value of forecasted future cash flows discounted at the yield established at the time of assignment. This allowance calculation is completed for each individual Dealer. Future cash flows are comprised of estimated future collections on the Consumer Loans, less any estimated Dealer Holdback payments. We write off Dealer Loans once there are no forecasted future cash flows on any of the associated Consumer Loans, which generally occurs 120 months after the last Consumer Loan assignment."

They write off Dealer Loans after 120 months or 10 years?  That sounds ridiculous.  If you recall, the Great Recession started in 2008 and I believe CACC benefited greatly from the "cash for clunkers" program.  Does that mean that Dealer Loans originated in 2008 are going to be written off starting this year?

I've been watching this stock from when the Foss' first started selling and it's gone up by over 50% so I have no idea where the price is heading.


Nice Catch - Nell.   So let me understand this - they write off loans generally after 10 YEARS.  This is totally nuts.
So basically if writeoffs only occur after 10 years (perhaps 5 years after the borrow defaults then who knows what the earnings are.  Wow.  Who knows how long this one can go on.

writeup on the writeoffs
https://www.hvst.com/attachments/13770/Credit-Acceptance-Corporation_Thesis_11-Feb-18.pdf
This is a friend (not myself) who is a very capable consultant for oil and gas investing. 

Deep Drilling Insights
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LC

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #14 on: March 26, 2018, 11:25:11 AM »
I would take a look at the asset lifecycle specifically any modifications if u can find the info. Lend car-->buyer goes into default-->repo car-->loan terms modified (outstanding balance is added to loan amount)-->buyer gets car back-->modified terms can't even then cover interest.

My guess is the above flow is how many of these loans will evolve. Regulators should be providing guidance or enforcing limits to this behavior.
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morningstar

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #15 on: March 26, 2018, 12:01:32 PM »
I remember looking at buying puts for CACC a while ago.  I came across the company when reading a write-up by John Huber.  If you look at insider trades, the owners (Foss family) started massively dumping shares starting from September 2016 at $198/share all the way to December 2017 at $326/share.

Also, something from their 10-K seemed really weird:

"An allowance for credit losses is maintained at an amount that reduces the net asset value (Dealer Loan balance less the allowance) to the value of forecasted future cash flows discounted at the yield established at the time of assignment. This allowance calculation is completed for each individual Dealer. Future cash flows are comprised of estimated future collections on the Consumer Loans, less any estimated Dealer Holdback payments. We write off Dealer Loans once there are no forecasted future cash flows on any of the associated Consumer Loans, which generally occurs 120 months after the last Consumer Loan assignment."

They write off Dealer Loans after 120 months or 10 years?  That sounds ridiculous.  If you recall, the Great Recession started in 2008 and I believe CACC benefited greatly from the "cash for clunkers" program.  Does that mean that Dealer Loans originated in 2008 are going to be written off starting this year?

I've been watching this stock from when the Foss' first started selling and it's gone up by over 50% so I have no idea where the price is heading.


Nice Catch - Nell.   So let me understand this - they write off loans generally after 10 YEARS.  This is totally nuts.
So basically if writeoffs only occur after 10 years (perhaps 5 years after the borrow defaults then who knows what the earnings are.  Wow.  Who knows how long this one can go on.

writeup on the writeoffs
https://www.hvst.com/attachments/13770/Credit-Acceptance-Corporation_Thesis_11-Feb-18.pdf

Borrowers basically never (cannot) default on Dealer Loans - the dealer effectively has no obligation to pay the money back. So I think this specific accounting practice means much less than you think it does. The important thing is the evaluation of the underlying Consumer Loans. The company's stated practice on that front is "We monitor and evaluate the credit quality of Consumer Loans on a monthly basis by comparing our current forecasted collection rates to our initial expectations." Variances then flow through the income statement on a quarterly basis.

Nell-e

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #16 on: March 26, 2018, 01:28:37 PM »
Thanks for the link, Longhaul.  I'm following Antonio on Twitter now.

Morningstar, I basically don't trust my own interpretation of accounting.  That's the biggest reason I didn't buy puts.

Irrespective, what's the bull thesis at this point?  Who's bidding this stock up?

Wfearful_Bgreedy

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #17 on: March 26, 2018, 09:57:37 PM »
- Holding Off
I am holding off on buying puts although based on that article by Antonio there might be a catalyst or event driven thesis.
I think this will be a long developing story and unfortunately I wasn't having much luck finding public data on auto loan modifications or even which dealers use CACC out of the population of dealers.
Was hoping to correlate census income demographics surrounding current used auto dealers using CACC vs. the remaining used auto dealers to estimate runway left and the extra resources needed to gain only marginal dealer presence.

- Future Catalyst
With regards to the bad write off policy per Antonio's article:

"The implementation of the new Financial Accounting Standards Board (FASB) Current Expected Credit Loss (CECL) model due
before Dec-19 puts a theoretical hard stop date to this practice. In 2018, analysts are likely to question management regarding
the impact of implementing such accounting standards."

I'm not an expert on credit loss modeling standards and what the new standards will mean.

- Public Data and Analysis
The current situation just seems odd for any new growth investors in an environment where the dealer market is saturated, competition is high, interest rates are rising, defaults are increasing, unemployment at all time low, consumer debt is tapped, used auto indexes point to lower residuals, and new accounting standards that appear to me more rigorous are coming in 2018. While I like the macro case I really wish there was more public data available at the loan level.

I think one interesting data option might actually be lending club. Although they don't service "sub-prime" 600 or lower they go down to 640. Also I think their loans cover auto refinancing at the moment so not sure how this piece adds value yet to the puzzle.
Their accepted and rejected loan data is available at:
https://www.lendingclub.com/info/download-data.action

Will most likely need to open this in python or import into a database as the row size will crash most spreadsheet software.


LongHaul

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #18 on: March 27, 2018, 06:37:13 AM »
Morningstar - I didn't understand your comment on why writing off the loan was not important.  Can you please elaborate.

2 data points for people to consider on CACC.  I will lay out the dots.
1.  ~35% ROE since 2009 in a brutally competitive business.
2.  Apparently only fully write off loans after 10 years.  (do say that if forecasted difference is unfavorable a provision for credit losses is established).
« Last Edit: March 28, 2018, 01:58:51 PM by LongHaul »
This is a friend (not myself) who is a very capable consultant for oil and gas investing. 

Deep Drilling Insights
www.deepdrillinginsights.com

morningstar

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Re: LEAP Puts on Sub Prime Auto Lenders
« Reply #19 on: March 28, 2018, 12:15:27 PM »
Morningstar - I didn't understand your comment on why writing off the loan was not important.  Can you please elaborate.

2 data points for people to consider on CACC.  I will lay out the dots.
1.  ~35% ROE since 2009 in a brutally competitive business.
2.  Only write off loans after 10 years.

The dealer doesn't owe them money at any point in their business model; CCAC pays dealers. So writing off the Dealer Loan is writing off a cash liability, not a cash asset - waiting longer is more conservative.

If CACC is going to lose money, it will be on the consumer loans where they are owed money by questionable counterparties, not on the Dealer Loans where they owe holdback to auto dealers.