Business Context and Reporting Period
Company: Consumer Portfolio Services, Inc. (CPSS)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: CPS is a specialty finance company that purchases and services retail automobile contracts from franchised and independent dealers, primarily targeting sub-prime customers. The company funds these contracts through warehouse credit facilities and securitizations. Due to adverse economic conditions and capital market disruptions since late 2007, the company significantly reduced contract purchases to conserve liquidity, resulting in a shrinking managed portfolio.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total Revenues | $223.9 million | $368.4 million | (39.2%) |
| Net Income (Loss) | $(57.2) million | $(26.1) million | Worsened |
| Interest Income | $208.2 million | $351.6 million | (40.8%) |
| Provision for Credit Losses | $92.0 million | $148.4 million | (38.0%) |
| Net Charge-Off Rate | 11.0% | 7.7% | +330 bps |
| Total Assets | $1,068.3 million | $1,638.8 million | (34.8%) |
| Total Debt Outstanding | $1,014.8 million | $1,548.9 million (Liabilities) | Significant Reduction |
| Managed Portfolio | $1,194.7 million | $1,664.1 million | (28.2%) |
| Cash and Equivalents | $12.4 million | $22.1 million | (43.9%) |
| Shareholders' Equity | $35.6 million | $89.8 million | (60.4%) |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues dropped 39.2% primarily due to a 40.8% decrease in interest income, driven by a reduction in the finance receivables portfolio held by consolidated subsidiaries (from $1.48 billion to $922.7 million).
- Increased Losses: Net loss more than doubled to $57.2 million. While the provision for credit losses decreased by $56.4 million due to the smaller portfolio size, the net charge-off rate increased significantly to 11.0% from 7.7% due to economic weakness and higher unemployment.
- Portfolio Contraction: The managed portfolio decreased by $469.4 million. The company purchased only $8.6 million in new contracts in 2009 compared to $296.8 million in 2008.
- Debt Reduction: Securitization trust debt decreased by $499.4 million as the company repaid debt from collections and did not complete any new securitizations in 2009.
- Cost Cutting: Employee costs decreased 23.7% to $37.3 million following workforce reductions in marketing and origination. Marketing expenses fell 63.0% to $3.8 million.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management plans to return to profitability by gradually increasing contract purchases as liquidity improves. In Q4 2009, the company originated $6.1 million in contracts. In Q1 2010, originations increased to $17.1 million following the entry into a new $50 million funding facility in March 2010 with a lower interest rate (11.0%) compared to the prior facility (14.0%). The company notes that reduced competition has allowed for higher acquisition fees (11.7% of amount financed in 2009 vs. 3.9% in 2008) and higher interest rates on purchased contracts (19.9% in 2009 vs. 18.5% in 2008).
Risks and Contingencies
- Liquidity and Capital Markets: Access to capital markets remains impaired. The company relies on a $50 million revolving credit facility (Fortress Credit Corp.) and has no immediate plans for term securitizations. Failure to secure future financing could force a cessation of contract purchases.
- Covenant Waivers: The company has received temporary waivers for potential breaches of financial covenants (minimum net worth, financial loss) on its residual interest financing and warehouse facilities. These waivers expire in 2010, and failure to obtain extensions could result in default, acceleration of debt, or loss of servicing rights.
- Credit Quality: Delinquencies and net charge-offs remain elevated due to the recession. Total delinquencies and repossessions represented 8.8% of the gross servicing portfolio at year-end.
- Legal Proceedings: The company is involved in the "Stanwich Litigation," a class action involving an affiliate of a former chairman. While claims were settled in 2005, an adversary action remains pending. Management believes exposure is limited but notes an adverse judgment could be material.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the temporary waivers for net worth and loss covenants on the residual interest and warehouse facilities, and the likelihood of renewal in 2010.
- Liquidity Runway: Assess the sufficiency of the $12.4 million unrestricted cash balance and the $50 million credit facility to fund operations and debt service until new securitizations can be completed.
- Debt Maturities: Review the maturity schedule for the $56.9 million residual interest financing (due June 2010) and the $5.0 million senior secured note (due May/October 2010) to evaluate refinancing risks.
- Portfolio Performance: Monitor the trend of net charge-off rates (currently 11.0%) and delinquency levels to ensure they do not exceed the assumptions used in the allowance for loan losses.
- Securitization Market: Evaluate the company's ability to execute term securitizations, which are critical for long-term funding and releasing cash from spread accounts.