Finance
FINANCE
Subprime Auto Defaults Are Soaring, and PE Firms Have No Way Out
Private-equity firms that plunged headlong into subprime auto lending are discovering just how hard it might be to get out.
A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.
In the years after the financial crisis, buyout firms poured billions into auto finance, angling for the big profits that come with offering high-interest loans to buyers with the weakest credit. At rates of 11 percent or more, there was plenty to be made as sales boomed. But now, with new car demand waning, they’ve found the intense competition -- and the lax underwritingstandards it fostered -- are taking a toll on profits.
Delinquencies on subprime loans made by non-bank lenders are soaringtoward crisis levels. Fresh investment has dried up and some of the big banks, long seen as potential suitors, have pulled back from the auto lending business. To top it off, state regulators are circling the industry, asking whether it preyed on borrowers and put them in cars they couldn’t afford.
“The PE guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t,” said Chris Gillock, managing director at Colonnade Advisors, a boutique investment bank. But right now, “it’s about as out-of-favor a sector as I can think of.”
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The Intriguing Math That Turns Manhattan Properties Into Shekels (2016)
What do Israeli investors know about retirement homes in Indiana? Enough to lend them $68 million.
Strawberry Fields, a real estate investment trust whose facilities cater to Alzheimer’s sufferers in the Midwest, is the latest of at least 14 U.S. property companies that have borrowed a combined 8.1 billion shekels ($2.07 billion) in the Israeli market since 2008, securing interest rates they could only dream of at home.
In Israel, U.S. property developers pay 5 or 6 percent interest on debt that in the U.S. would cost them twice that, according to Israeli bond buyers. Because the U.S. government’s credit rating is higher than Israel’s, the bonds get better grades, too. So what’s considered junk stateside can become investment grade in Israel, where there’s plenty of demand for the debt from funds flush with pensioners’ cash.
Gal Amit and Rafael Lipa, who structured the first such deal in 2007, have now done about 20 with eight companies. Several other Israeli investment banks and advisers have also arranged transactions. With competition heating up, Amit and Lipa, who initially marketed their services in the New York area, have taken their show on the road, pitching developers from Baltimore to Los Angeles on selling corporate bonds in Israel.
“It’s the cheapest equity you can dream of,” Amit said over lunch in Manhattan last month as he buzzed between meetings. “On the other hand, too much of it and it’s only a matter of time until you default. It’s for conservative issuers.”
China’s Searching for Stock Market Scapegoats (2015)
To commemorate the 70th anniversary of Japan’s World War II surrender, China planned a 12,000-soldier march down Beijing’s Chang’an Jie—Eternal Peace Street—on Sept. 3. For President Xi Jinping, it was a chance to project an image of calm, order, and strength. Unfortunately for Xi, China’s financial markets are sending a completely different message.
War Hero With Eye Patch Helps Sell Israel Bonds in U.S. (2014)
Sales surged during Israel’s war against Hamas. To keep the phones ringing, theDevelopment Corp. for Israel turned to the most recognizable face in the Jewish state’s history: the hero with the eye patch, Moshe Dayan.
A photo of Dayan popped up in the Facebook feeds of thousands of prospects in the weeks leading up to the Jewish New Year, Sept. 24-25. Dayan, a general and government minister who died in 1981, stands in front of a banner advertising Israel Bonds, a supplement to government debt which helps the country pay for everything from roads and bridges to West Bank barrier walls and the Iron Dome missile-defense system.
It’s part of a marketing campaign hatched by an Australian who immigrated to Israel in 1979, Israel “Izzy” Tapoohi, 68, the brokerage’s chief executive officer. He’s served as chairman of Israel’s largest telecommunications company and as economic adviser to Prime Minister Benjamin Netanyahu, whose government appointed him in 2011 to lead the Development Corp., the underwriter of Israel bonds. At a time when the war in Gazahurt Israel’s image around the world, Tapoohi is doing all he can to strengthen the country’s ties, both financial and spiritual, with American Jews.
“We run a brokerage firm with a Jewish heart,” Tapoohi said in an interview at his midtown Manhattan office. “When there’s a crisis, you apply the Jewish heart. But otherwise it’s a strictly straightforward business.”