In early March, something terrible happened and almost no one noticed.
Springleaf, the subprime lending unit of AIG (the poster child for misjudging credit risk via CDS) bought OneMain, another subprime lender that’s been relegated to Citi’s Citi Holdings trash bin for years. We called it [12] a "match made in subprime hell." And we were right.
Both Springleaf and OneMain are in the personal loan business, which means they lend relatively small amounts to borrowers who use the money for all manner of things. Some of these loans are then run through Wall Street’s securitization machine. The result: paper which generally falls into the always treacherous "other" or "esoteric" category of the consumer ABS space. So far, 2015 has seen about $10 billion in supply and total issuance of consumer ABS backed by "other" credits should come in at around $30 billion for the year - that’s up sharply from just $13.2 billion in 2014. As we discussed in detail when the deal first hit the wires, Springleaf and OneMain have together spearheaded the unlikely re-emergence of ABS backed by subprime personal loans. In 2013 for instance, Springleaf did a $604 million ABS deal backed by nearly 200,000 personal loans (average FICO 602) with maturities ranging from 2-4 years and carrying fixed rates as high as 35%. Springleaf was back at it not four months later, contemplating another $400 million ABS deal. In 2014, the company set up two VIEs for the purpose of selling almost $900 million in ABS backed by consumer loans, and in February, the company priced a $1.16 billion deal. For its part, OneMain did a $760 million deal in April of last year (backed by quite a few unsecured loans) followed by a $1.2 billion dollar deal around three months later. The company went on to do 2015’s first securitization backed by consumer loans, a January deal that was upsized to $1.2 billion.
The important point here is that before Springleaf and OneMain’s efforts these deals were dead. As we said [13] more than two years ago, "one thing that was hardly ever sold even in the peak days of the 2007 credit bubble were securitizations based on personal-loans, the reason being even back then everyone's memory was still fresh with the recollection that it was precisely personal-loan securitization that was at the core of the previous, and in some ways worse, credit bubble - that of the late 1990s, which resulted with the bankruptcy of Conseco Finance."
Earlier this month, Springleaf disclosed that the deal for OneMain may be delayed because unsurprisingly, the Justice Department has "expressed potential concerns." In what might very well be an effort to put a friendly face on what otherwise looks like an attempt to create a subprime lending powerhouse with some $14 billion in possibly-toxic receivables, Wesley Edens, chairman and co-founder of Fortress Investment Group, which has a majority stake in Springleaf took advantage of a profile piece in WSJ to remind the world that it’s “not a shameful thing helping people finance themselves” - even at 26%. Below are some notable excerpts from the piece [14]. Consider Edens' comments along with what we've said above, and draw your own conclusions.
Wesley Edens still rues his decision not to bet against subprime mortgages before the financial crisis. That left Fortress Investment Group LLC, the private-equity and hedge-fund firm where he is co-founder and co-chairman, exposed to big losses that sank its stock price below $1.
On Wall Street, the best way to get over a losing trade is to bounce back with a winner. Mr. Edens is enjoying a surprising whopper: subprime loans.
A resurgence in loans to Americans with scuffed or limited credit is giving Fortress one of the largest financial windfalls in the history of the private-equity industry.
The New York company’s majority stake in subprime lender Springleaf Holdings Inc. has ballooned in value to $3.5 billion—putting the firm’s gain at more than 27 times Fortress’s original investment of $124 million in 2010. Buying the stake was Mr. Edens’s idea.
The giant gains have helped offset recent stumbles by Fortress in its “macro” hedge-fund business—and made Mr. Edens the new subprime king.
“It’s not how I want my epitaph to read,” he says of the label, “but it’s not a shameful thing helping people finance themselves. It’s not a bad thing.”
Today’s expanding subprime-loan market is different from the last one. This boom is fueled largely by auto loans, credit cards and personal loans, which appeal to borrowers straining under the limp economic recovery and puny wage gains.
More than one-third of all auto, credit-card and personal loans from the start of January to the end of April went to subprime borrowers, according to the latest available data from credit-reporting firm Equifax Inc. That is the highest percentage since 2007.
Lenders made 53.7 million auto, credit-card and personal loans in the first four months of 2015, up 46% from 2010. Originations of personal loans, like those made by Springleaf, are up 22% in the same period.
Mr. Edens and other Fortress executives are pushing hard to get even bigger in subprime lending. In March, Springleaf agreed to pay Citigroup Inc. about $4.25 billion in cash for the bank’s OneMain Financial unit.
If the deal is completed, Springleaf would become the largest lender focused on subprime in the U.S., with about 2.5 million customers and 2,000 branches.
Mr. Edens says Springleaf won’t contribute to a new subprime meltdown no matter how big it gets. The reason: Unlike lenders who sank during the financial crisis, Springleaf says it verifies each applicant’s income and won’t make the loan unless it is sure the borrower can pay it back.
“Lending to people without great credit wasn’t the problem,” he says. Instead, too many Americans got too much credit from lenders based on inflated real-estate values.
“A lot of people live paycheck to paycheck, and if they don’t have financing it’s not good for the country,” Mr. Edens adds. “This is a more humane way of people dealing with credit.”
Springleaf makes secured and unsecured personal and auto loans of as much as $25,000. All the loans have fixed interest rates. The average loan is about $4,300 and usually is repaid in 19 months. The company sees a potential market of 120 million Americans who need cash.
The average interest rate on Springleaf’s loans is 26%. Consumer advocates criticize the high rates on many subprime loans and say lenders often pile on additional fees with products such as credit insurance. Many borrowers have to get new loans to pay off old ones, consumer advocates argue.
Springleaf says high interest rates are needed because about 6% of its borrowers default each year.
Springleaf has benefited from banks’ skittishness about subprime personal loans. At the end of the second quarter, the company had 958,000 customer accounts, up 11% from a year earlier.
Now the company is expanding in auto lending and other areas, though it has no current plans to make mortgage loans. Springleaf has told investors it will target customers with FICO scores of 500 to 750, especially those with scores of less than 699.
