Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
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 long-term securitizations.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $66,050 | $103,301 |
| Net Income (Loss) | $(509) | $2,114 |
| Net Cash from Operating Activities | $27,484 | $37,328 |
| Net Cash from Investing Activities | $119,366 | $(1,081) |
| Net Cash from Financing Activities | $(148,168) | $(38,619) |
| Cash and Cash Equivalents (End of Period) | $20,766 | $18,508 |
| Finance Receivables, Net | $1,207,391 | $1,339,307 |
| Total Debt Outstanding | $1,383,000 | $1,527,300 |
| Provision for Credit Losses | $16,089 | $34,909 |
Liquidity: As of March 31, 2009, the company held $20.8 million in unrestricted cash and $151.7 million in restricted cash. The company reported no available warehouse credit facilities and no immediate plans to complete term securitizations.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 36.1% to $66.1 million, driven primarily by a 38.4% drop in interest income due to a shrinking portfolio of finance receivables.
- Net Loss: The company reported a net loss of $0.5 million compared to a net income of $2.1 million in the prior year. This was due to reduced revenue volumes and continued credit loss provisions.
- Portfolio Contraction: The managed portfolio decreased to $1.49 billion from $2.09 billion in the prior year. Purchases of new automobile contracts were reduced to nominal levels (83 contracts totaling $1.1 million) to conserve liquidity.
- Expense Reduction: Total operating expenses decreased 33.1% to $66.6 million. Employee costs dropped 31.3% and marketing expenses fell 67.6% due to the halt in new contract purchases.
- Debt Repayment: The company repaid $142.3 million in securitization trust debt during the quarter. Warehouse debt outstanding decreased to $7.5 million, with the facility amended to allow no further advances.
- Credit Quality: Annualized net charge-offs increased to 11.6% of the average servicing portfolio, up from 6.7% in the prior year, reflecting broader economic weakness and higher unemployment.
Outlook, Risks, and Management Commentary
- Capital Market Constraints: Management cites unprecedented adverse changes in the market for asset-backed securities since late 2007. Liquidity is reduced, demand for sub-prime securities is low, and financial guaranty providers have largely withdrawn.
- Liquidity Strategy: The company is conserving liquidity by purchasing only nominal levels of new contracts. There are no immediate plans for new securitizations.
- Covenant Waivers: The company has received temporary waivers regarding potential breaches of covenants related to minimum net worth and the maintenance of active warehouse credit facilities. Without these waivers, insurers could terminate CPS as servicer.
- Legal Contingencies: Ongoing litigation related to the "Stanwich Case" remains pending. While a settlement was reached in principle, the bankruptcy court rejected it, and an appeal was denied in April 2009. An adverse judgment could materially affect financial position.
- Forward-Looking Risks: Risks include the inability to obtain future financing, worsening economic conditions leading to higher delinquencies, and the potential termination of servicing agreements by insurers.
Investor Verification Checklist
- Financing Availability: Verify the status of the temporary covenant waivers and the likelihood of securing new warehouse lines or securitization capacity.
- Credit Loss Trends: Monitor the trajectory of delinquency rates and net charge-offs, which have risen significantly (11.6% annualized) and could accelerate.
- Liquidity Runway: Assess whether the $20.8 million in unrestricted cash and operating cash flows are sufficient to service the $1.38 billion debt load without new financing.
- Legal Exposure: Track the resolution of the Stanwich litigation and any potential indemnification liabilities.
- Portfolio Performance: Review the performance of the remaining managed portfolio, particularly the aging of receivables and recovery rates on repossessed vehicles.