Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPS)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 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) | Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $124,371 | $202,082 |
| Net Income (Loss) | $(6,462) | $3,603 |
| Diluted EPS | $(0.34) | $0.18 |
| Net Cash from Operating Activities | $59,570 | $84,076 |
| Net Cash from Investing Activities | $235,133 | $76,462 |
| Net Cash Used in Financing Activities | $(295,281) | $(159,619) |
| Cash and Cash Equivalents (End of Period) | $21,506 | $21,799 |
| Restricted Cash | $139,580 | $153,479 |
| Total Debt Outstanding | $1,239,431 | $1,527,258 |
| Finance Receivables, Net | $1,087,108 | $1,339,307 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 38.5% to $124.4 million, driven primarily by a 40.2% drop in interest income due to a shrinking portfolio of consolidated finance receivables.
- Net Loss: The company reported a net loss of $6.5 million compared to a net income of $3.6 million in the prior year. This shift was caused by reduced revenue volumes and a $34.6 million provision for credit losses.
- Portfolio Contraction: The managed portfolio decreased to $1.33 billion from $1.98 billion year-over-year. Purchases of new automobile contracts were reduced to nominal levels ($2.0 million) to conserve liquidity.
- Expense Reduction: Total operating expenses fell 33.1% to $130.8 million. Employee costs dropped 30.8% as headcount was reduced from 859 to 525 employees. Marketing expenses fell 66.7% due to the halt in new contract purchases.
- Credit Quality: Annualized net charge-offs increased to 11.1% of the average servicing portfolio, up from 6.8% in the prior year, reflecting economic weakness and higher unemployment.
Outlook, Risks, and Management Commentary
- Liquidity Constraints: As of June 30, 2009, CPS has no available warehouse credit facilities and no immediate plans to complete term securitizations. The company is relying on cash flows from existing portfolios and restricted cash reserves.
- Covenant Waivers: The company obtained temporary waivers from note insurers regarding minimum net worth and active warehouse facility covenants for eight of its 17 securitization transactions. Without these waivers, the company would be in default. These waivers are temporary, and there is no assurance of future extensions.
- Default Premiums: Due to covenant breaches, the company is paying default insurance premiums (25 to 100 basis points) on approximately $655.7 million of insured notes, which increases interest expense.
- Capital Markets: Management cites unprecedented adverse changes in the asset-backed securities market, including reduced liquidity and the withdrawal of financial guaranty providers, as the primary drivers for the business slowdown.
- Stock Repurchases: The company continued to repurchase common stock, buying 215,865 shares in Q2 2009 at an average price of $0.84 per share.
Investor Verification Checklist
- Financing Access: Verify the status of warehouse credit facilities and the feasibility of future securitizations given the current market environment.
- Covenant Compliance: Monitor the duration and renewal status of the temporary waivers obtained from note insurers to avoid default.
- Credit Loss Trends: Track the trajectory of delinquency rates and net charge-offs, which have risen significantly to 11.1% annualized.
- Liquidity Runway: Assess the sufficiency of unrestricted cash ($21.5 million) and restricted cash ($139.6 million) to meet debt service obligations without new financing.
- Portfolio Performance: Review the performance of the remaining $1.33 billion managed portfolio, particularly the impact of the aging portfolio on future cash flows.