Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Reporting Period: Quarterly period ended June 30, 2008 (Form 10-Q)
Business Model: CPS purchases and services retail automobile installment sale contracts, primarily for sub-prime customers. The company funds these purchases through warehouse credit facilities and long-term asset-backed securitizations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|
| Total Revenues | $98,781 | $202,082 | $182,294 |
| Net Income | $1,489 | $3,603 | $6,719 |
| Earnings Per Share (Diluted) | $0.08 | $0.18 | $0.29 |
| Net Cash from Operating Activities | N/A | $84,076 | $67,725 |
| Finance Receivables, Net | $1,826,741 | $1,826,741 | $1,967,866 |
| Total Debt (Securitization + Warehouse + Other) | $1,976,755 | $1,976,755 | $2,115,227 |
| Cash and Cash Equivalents | $21,799 | $21,799 | $13,437 |
Note: Total Debt calculated as sum of Warehouse lines of credit, Residual interest financing, Securitization trust debt, Senior secured debt, and Subordinated renewable notes.
Material Changes vs. Prior Period
- Profitability Decline: Net income for the six months ended June 30, 2008, dropped 46.4% to $3.6 million from $6.7 million in the prior year period. Diluted EPS fell from $0.29 to $0.18.
- Revenue Growth vs. Expense Pressure: While total revenues increased 10.9% year-over-year (driven by a 14.3% increase in interest income), operating expenses rose 14.6%. Interest expense surged 26.5% to $80.0 million due to higher rates on new securitizations and increased residual financing costs.
- Portfolio Contraction: The managed portfolio decreased from $2.126 billion at December 31, 2007, to $1.980 billion at June 30, 2008. This contraction is a direct result of curtailing new contract purchases to preserve liquidity amid capital market disruptions.
- Reduced Purchases: Purchases of automobile contracts dropped significantly to $255.9 million in the first half of 2008, compared to $676.3 million in the same period of 2007.
- Credit Quality: Annualized net charge-offs as a percentage of the average servicing portfolio increased to 6.8% for the six months ended June 30, 2008, compared to 4.6% in the prior year.
Outlook, Risks, and Management Commentary
- Capital Market Uncertainty: Management highlights "unprecedented adverse changes" in the securitization market since Q4 2007, including reduced liquidity and higher costs for credit enhancement. The April 2008 securitization required significantly greater credit enhancement and higher interest rates than previous transactions.
- Liquidity Strategy: CPS has curtailed purchases of new contracts to extend the time before warehouse financing capacity is exhausted. Management states that current cash flows are sufficient to meet near-term operating needs but warns that an inability to securitize receivables could materially adversely affect operations.
- Debt Restructuring: In July 2008 (subsequent to period end), the company amended its residual credit facility, eliminating the revolving feature and increasing interest rates. Additionally, the company secured $25 million in new senior secured debt (issued in June and July 2008) to bolster liquidity.
- Warehouse Facility Risk: One of the two primary warehouse facilities is provided by an affiliate of Bear Stearns (acquired by JPMorgan Chase). There is uncertainty regarding the renewal of this facility, which expires in November 2008.
- Legal Proceedings: The company is involved in the "Stanwich Litigation." While a settlement was reached in principle, the bankruptcy court rejected it, and the matter is on appeal. An adverse judgment could have a material adverse effect on financial position.
Investor Verification Checklist
- Securitization Pipeline: Verify the company's ability to execute future term securitizations given the current market freeze and increased cost of capital.
- Warehouse Renewal: Confirm the status of the renewal for the Bear Stearns/JPMorgan Chase warehouse facility expiring in November 2008.
- Credit Loss Trends: Monitor the trend of net charge-offs (currently 6.8% annualized) and delinquency rates to assess the adequacy of the allowance for credit losses.
- Liquidity Runway: Assess the sufficiency of unrestricted cash ($21.8 million) and available warehouse capacity ($251.9 million) against the declining portfolio size.
- Legal Exposure: Track the outcome of the Stanwich bankruptcy appeal and potential indemnification liabilities.