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 . 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 ( 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.) which provides computerized subprime auto portfolio analysis using proprietary data mining technology.