Posted 5 years ago
By Kenneth B. Shilson
President and Founder, Subprime Analytics
This is my final article in a five-part series about how
the business models used by independent dealers during 2017 differed from those
used in subprime auto bond securitizations. Copies of the previous articles in this series
can be downloaded free of charge at www.subanalytics.com.
In those previous articles I explained
that the deep subprime deals included in the auto bond securitizations were
newer vehicles, with higher sales prices and amounts financed, larger repayments,
and most importantly much longer contract terms.
These securitizations fueled unprecedented competition in
the subprime auto finance business during the last 3 years and caused
independent operators who refused to match the aforementioned deal terms to
lose market share. Some of the deep
subprime securitized deals are not generating the returns expected by investors
who participated in them and the current market emphasis (and their investments)
has shifted to prime and near-prime customers in 2018. This shift creates an unprecedented
opportunity for deep subprime independents to regain lost market share and to
profit in a less competitive environment.
In directing the National Alliance of Buy Here, Pay Here
Dealers (NABD) during the past 19 years, I received some sage advice from BHPH
Hall of Famer Bruce Kennett - who said, “cash is the only thing that is real in
BHPH; everything else is an illusion.” How
prophetic that saying has become for me and, hopefully, everyone who reads this
article. Operators are often seduced by
paper financial statement profits, which often do not convert into cash. I refer to these accrual-basis financial profits
as “fool’s gold” (when receivables default instead of paying off).
At Subprime Analytics, we use cash basis return on
investment (ROI) calculations as the primary gradient in evaluating portfolio
performance. This ROI calculation
requires using static pool and loss liquidation rates to loss adjust estimated
future cash flows, divided into each operator’s investment in their portfolio. The result is then converted to an annual
percentage. We believe that a successful
portfolio must command a return commensurate with its risk. For many years I searched for a mathematical
equation that measures risk in the deep subprime (BHPH) market. After analyzing more than 2 million loans
aggregating $20 billion in contracts, I concluded that “cash in deal” best
measures portfolio risk.
Recently, I extracted the five highest ROI portfolios from
my database of originations during the last four years and “drilled down” into
their underlying business models. To my
surprise, all these models were substantially identical. That is, contract terms were less than 40
months in length, down payments approximated $1,000 or more, average amounts
financed were $9,000 - $10,000, and average weekly payments averaged $90 or
more. Although there are many different
business models used by operators today, the numbers don’t lie and some produce
a much better ROI than others!
Do you know what ROI your portfolio generates? If not, shouldn’t you determine your own ROI
and whether it compensates for the portfolio risk you are taking? If your ROI is not what you expect or want it
to be, how can you improve it? The
answer can be found by analyzing your portfolio, to understand what works and
what doesn’t. At Subprime Analytics, we
can stratify (“drill down”) all the deals in a portfolio by looking at the
customers, the vehicles, and the deal structures. When these align properly, defaults are
reduced dramatically and ROI is increased.
What’s ahead for independent operators in 2018 and 2019? Although competition in deep subprime will be
reduced so, too, will capital availability. If you aren’t using analytics today, you won’t
be borrowing money tomorrow! Therefore,
you need to build data which supports your portfolio performance, if you plan
to leverage it.
Where can you get more guidance in making your own
portfolio more profitable? First,
analyze your portfolio performance to learn if your business model is
generating an appropriate ROI. Second,
attend the next NABD Conference in Las Vegas on Oct. 8-10, 2018 to understand
the market challenges you must overcome. The more you learn, the more you will earn. Good luck!
Kenneth Shilson is President of Subprime
Analytics (www.subanalytics.com)
which provides computerized subprime auto portfolio analysis using proprietary
data mining technology. To date, the
company has analyzed over 2 million subprime auto deals aggregating $20
billion. The company provides portfolio
analysis, profit and cash flow enhancement and other consulting services to
operators and capital providers nationwide.
Mr. Shilson is the President and Founder of NABD, which merged with
NIADA on January 1, 2018.