Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2010
Business Overview: CPS is a specialty finance company that purchases and services retail automobile installment sale contracts, primarily for sub-prime customers. The company funds these purchases through warehouse credit facilities and securitization transactions. As of June 30, 2010, the total managed portfolio was approximately $931.6 million, a significant decrease from $1.33 billion in the prior year due to capital market constraints.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2010 |
Six Months Ended June 30, 2009 |
|---|---|---|
| Total Revenues | $83,117 | $124,371 |
| Net Income (Loss) | $(14,786) | $(6,462) |
| Net Cash Provided by Operating Activities | $30,245 | $59,570 |
| Net Cash Provided by Investing Activities | $164,034 | $235,133 |
| Net Cash Used in Financing Activities | $(193,270) | $(295,281) |
| Total Debt Outstanding | $828,800 | $1,014,800 |
| Cash and Cash Equivalents | $13,442 | $21,506 |
| Finance Receivables, Net | $667,588 | $840,092 |
Profitability & Margins: The company reported a net loss of $14.8 million for the six-month period. The loss before income tax was $11.2 million. The company recorded an income tax expense of $3.6 million, primarily due to an increase in the valuation allowance for deferred tax assets. The annualized net charge-offs as a percentage of the average servicing portfolio remained stable at 11.0%.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by 33.2% ($41.3 million) compared to the prior year. This was driven primarily by a 36.2% decrease in interest income, resulting from a smaller portfolio of finance receivables held by consolidated subsidiaries.
- Expense Reduction: Total operating expenses decreased by 27.9% ($36.5 million). The provision for credit losses dropped 46.0% to $18.7 million, and interest expense fell 29.1% to $43.3 million, reflecting the reduced debt load and portfolio size.
- Portfolio Contraction: The managed portfolio owned by consolidated subsidiaries decreased from $1.17 billion in 2009 to $720 million in 2010. However, the company began servicing third-party portfolios, adding $103.9 million to the total managed portfolio.
- Debt Repayment: The company repaid $222.8 million in securitization trust debt during the six-month period, reducing total debt by approximately $186 million year-over-year.
Outlook, Risks, and Management Commentary
Liquidity and Financing: Management notes that access to capital markets remains impaired. The company has secured two new facilities to fund operations: a $50 million revolving credit facility with Fortress Credit Corp. (outstanding balance $29.5 million) and a $50 million term funding facility (outstanding balance $16.6 million). There are no immediate plans to complete a term securitization.
Covenant Waivers: The company is currently in violation of certain financial covenants (minimum net worth, maximum losses, leverage) for seven of its 12 outstanding securitization transactions. However, note insurers have granted temporary waivers. Without these waivers, the company would face default premiums and potential termination as servicer. Cash is being diverted into spread accounts for three affected transactions.
Legal Contingency: CPS identified a potential rescission liability regarding its renewable unsecured subordinated notes. Due to an expired registration statement, purchasers of $4.2 million in notes sold between July 2009 and June 2010 may have a statutory right to rescind their purchases, potentially requiring the company to repurchase the notes.
Outlook: The company plans to gradually increase contract purchases to return to profitability, relying on the new credit facilities. Management expects to maintain operating costs at levels matching available capital. There is no assurance that future securitizations can be completed or that waivers will be extended.
Key Facts for Investor Verification
- Covenant Compliance: Verify the status of the temporary waivers from note insurers regarding financial covenants and the risk of termination as servicer.
- Rescission Liability: Assess the potential financial impact of the $4.2 million subordinated notes rescission risk and any legal developments.
- Capital Market Access: Monitor the company's ability to secure long-term financing via securitization, as current operations rely heavily on higher-cost warehouse and term facilities.
- Portfolio Performance: Review the stability of the 11.0% annualized net charge-off rate against the backdrop of a shrinking portfolio and economic conditions.
- Deferred Tax Assets: Evaluate the $35.9 million valuation allowance against deferred tax assets and the likelihood of future realization.