Unstable Market Conditions Drive Triad Financial to Pull Out of Indirect Lending Market
NORTH RICHLAND HILLS, Texas — Triad Financial stopped all originations via its indirect dealer channel as of May 23, company officials told SubPrime Auto Finance News this week.
However, Triad continues to originate loans through RoadLoans, its direct lending channel, executives indicated.
Discussing the reasoning behind the move to cease operations in its indirect channel, the company explained, "Conditions in the financial markets have been extraordinarily unstable and have hindered our ability to adequately and cost-effectively fund future business through traditional methods, including asset-backed securitizations."
The statement went on to say, "Triad has served the dealer community for more than 18 years and values the relationships we have enjoyed with these dealers and the customers we share. We will no longer accept new applications as of 5 p.m., May 23."
The company also reported that it will honor existing approvals and fund eligible contracts forwarded by dealers through June 23.
Overall, officials said, "This announcement affects approximately 220 employees who work primarily in the indirect lending organization."
In addition to continuing to approve loans via its direct lending channel, Triad reported it will "also continue its portfolio management operations at its corporate headquarters in North Richland Hills, Texas, with related customer care, loan servicing, loss recovery and remarketing functions there."
Moreover, the company said it will continue to employee support staff at both its Texas-based and Huntington Beach-based facilities, representing almost 1,000 associates.
Looking to the future, Scott France, senior vice president of portfolio management, told SubPrime Auto Finance News, "We have a multibillion-dollar portfolio to manage, and we are very pleased with our results in terms of improved servicing levels and decreased delinquency.
"In addition, we have been working on a new and improved remarketing program, including the development of a best-in-class certification program, which we look forward to rolling out this summer. This new program will better meet the needs of dealers and auctions, and boost revenue for everyone involved," he added.
Triad's Latest SEC Filing
According to the company's latest quarterly SEC report filed May 14, in early May, Triad Financial and some of its subsidiaries agreed to amend its Warehouse Lending Agreement, which was dated April 29, 2005.
The amendments included several items:
—Triad will borrow a maximum of $125 million between May 6 and June 30 to purchase newly originated contracts, in addition to the amount currently drawn under the facility, which was about $505 million as of May 6.
—After June 30, there will be no additional borrowings.
—After June 1, all collections from contracts pledged under the Warehouse Lending Agreement will be used to pay down the loans.
Furthermore, in the SEC filing, the company indicated that its Master Residual Loan Agreement also underwent some amendments:
—After May 8 there will be no new borrowings, in addition to the amount currently drawn under the facility, which is about $67 million as of May 6.
—For the period of May 6 to June 30, after payments of interest and fees, 75 percent of remaining collections from the securitization trusts' residual assets will be paid to the lender in respect of principal, and any amounts remaining thereafter will be distributed as set forth in the Residual Loan Agreement, including for payment to Residual LLC.
—After June 30, after payments of interest and fees, 100 percent of remaining collections from the securitization trusts' residual assets will be paid to the lender in respect of principal, and any amounts remaining thereafter will be distributed as set forth in the Residual Loan Agreement.
Triad Financial stated that it is in negotiations to gain new facilities to provide alternative funding.
"The company entered into a $49.5 million unsecured promissory note with one of its indirect equity holders, Hunter's Glen/Ford Ltd. To provide interim funding on May 11, 2008," the SEC report said.
In other news, the filing indicated, "The company and Residual LLC are also in negotiations to enter into a new residual facility with Hunter's Glen/Ford Ltd. And GTCR Golder Rauner II, LLC, two of the company's indirect equity holders, to provide funding to replace this promissory note. This new residual facility will be secured by a second priority security interest in the securitization trusts' residual assets pledged under the Residual Loan Agreement. Once the Residual Loan Agreement is paid in full, the new residual facility will have a first priority security interest in the securitization trusts' residual assets."
Triad also reported its latest quarterly financial results for the period ending March 31. The company's net income came in at $0.9 million, compared with $8.9 million for the same time frame of 2007.
"The decrease in net income was primarily due to a decline in other revenues (expenses) and lower net interest margin, partially offset by a lower provision for credit losses," officials stated.
"Our results included $15 million and $0.8 million in losses on our derivative financial instruments for the three months ended March 31, 2008 and 2007, respectively," they continued.
Average-owned receivables were down by 7.7 percent for the quarter, compared to last year. Executives attributed this to a lower level of originations, along with repayments and charge-offs as the portfolio ages.
"We purchased and originated $249.6 million of auto contracts during the three months ended March 31, 2008, as compared to $304 million during the three months ended March 31, 2007," officials wrote.
Overall, the company said, "This decrease in originations was primarily due to lower levels of originations in both our direct and dealer channels. In response to higher than expected losses on receivables originated during 2006, we modified our contract origination strategy to better manage our credit risk, which resulted in lower volume levels during the last quarter of 2006 and throughout 2007."
In another move, officials said, "Additionally, in response to problems currently being experienced in the asset-backed securitization market for non-prime loan originations, the company further tightened its underwriting criteria and increased pricing during the first quarter of 2008, which resulted in lower volume levels during the first quarter. We have also reduced the number of dealers we buy contracts from and have ceased accepting online applications from some direct lending sources."
The median new contract size came in at $17,945, down a bit from $18,476 in the previous year.
Looking further at the credit markets, the company reported that as of March 31, the cumulative net loss ratio for Triad's 2006-B and 2006-C trusts each exceeded one of their target ratios. This means that "the credit enhancement requirement to maintain cash reserves as a percentage of the portfolio immediately increased from 2 percent to 3 percent, resulting in a delay in cash distributions to the company. This requirement will remain at 3 percent until the trusts are back in compliance with their targets for three consecutive months."
Given the current economy, Triad said it could lead one or more of its ratios to surpass targeted levels, causing stress on the company's liquidity position.
"If that occurred, we could be required to significantly decrease contract origination activities and implement other significant expense reductions if securitization distributions to us are materially decreased for a prolonged period of time," the report stated.
"The past several months have seen unprecedented turmoil in the global credit markets in general, and the asset-backed securitization markets in particular," the document continued. "The well-publicized problems involving credit insurance providers may also have an impact on our ability to execute securitizations.
"Recently, AMBAC Inc., which has provided credit enhancement insurance on three of our securitization transactions since May 2005, announced that it would not provide such insurance on automobile securitizations in the future. Those companies that continue to provide credit enhancement insurance may be less likely to do so at the rates and on the terms at which prior transactions were executed in 2006 and early 2007," executives explained.
Continuing on, the SEC filing said, "We believe that we will continue to require the execution of securitization transactions, along with borrowings under our warehouse and residual facilities in order to fund our future liquidity needs."
Triad indicated that it can make "no assurance that funding will be available to us through these sources or, if available, that it will be on terms acceptable to us. If these sources of funding are unavailable to us on a regular basis, we may be required to further decrease contract origination activities and implement additional expense reductions, all of which may have a material adverse affect on our ability to achieve our business and financial objectives."
On a positive note, in late May, AmeriCredit announced a $750 million asset-backed securitization under its automobile receivables trust, which mostly covers subprime auto loans. So perhaps the reins on the credit market are loosening a bit, which could mean good news for Triad down the road.
Editor's Note: For more information on Triad's new remarketing program, stay tuned to SubPrime Auto Finance News and its sister publication, Auto Remarketing.