Springleaf Holdings and the Re-Emergence of Sub-Prime Consumer Lending

Springleaf Holdings and the Re-Emergence of Sub-Prime Consumer Lending

Editor’s note: throughout the credit crisis, we discovered that making loans to over-indebted customers could possibly be a tremendously business that is bad. Even though it’s tough to directly attribute causality, 487 banks have actually unsuccessful in the us since 2008. A healthier part of those problems most likely is because of making subprime loans.

But that is the last. One of several things we learn in investing is the fact that thing that is same carried out in differing times and various methods, can provide shockingly different outcomes. The report below is really a bull case for the equity in a subprime loan provider previously owned by AIG.

The writer contends that the business can be set for a future that is bright of a confluence of facets that could have felt unlikely just a couple months ago, such as the return of this asset-backed securities (ABS) market as well as the credit quality of subprime borrowers. You would have reacted to these same words written just a few years ago as you read, imagine how.

Springleaf Holdings (NYSE: LEAF) combines an amount of major themes appearing through the present credit crisis, such as the changing focus of “too big to fail” banks, the general deleveraging of household credit, therefore the falling and reemergence of this securitization areas, fueled in component because of the profile rebalance aftereffects of quantitative easing.

Springleaf sits right in the center of all of these themes because it funds its stability sheet through both securitizations of loans additionally the personal debt market — both areas revitalized with ZIRP (zero rate of interest policies) while the chase for yield. Possibly most interesting is the fact that this product was once owned by AIG, and then be offered in a fire purchase to personal equity company Fortress this season. Piecing together these facets, Springleaf presents an appealing chance of equity investors that in my opinion is likely to be rewarded on the coming years.

Executive summary:

  • Conducive environment when the Fed is accommodative and also the credit cycle is not deteriorating. Typically, these facets don’t happen simultaneously.
  • A pure use the subprime consumer financing section by which many big banks have gone the marketplace due to tighter laws.
  • Improved capital mix taking advantage of a continued return of ABS securitization and refinancing of high-cost legacy financial obligation in the market that is unsecured.
  • Springleaf’s credit quality will enhance, and expenses will fall because the legacy real-estate part runs down.
  • Utilization of the “push through” accounting method has held the estate that is real at

$1.5bil underneath the unpaid stability, supplying a strong pillow.

  • The company’s more recent servicing platform is scalable, which supplies fee income potential that is meaningful.
  • Strongly incentivized and experienced administration team.
  • Company overview

    Springleaf is just a customer loan provider supplying two to four-year fixed price loans for the purposes of family-related problems, medical dilemmas, loan consolidation, and home improvements. Springleaf has 834 branches in 26 states. The customer that is average $3,500 and has now an earnings of $47k and a FICO rating of 599; 85% of loans made are collateralized by the borrower’s individual home home, also difficult items, such as for instance ships and autos. Rates of interest that the business runs borrowers typical about 25.5% at the time of June 2013.

    During 2010, Fortress Investment Group (FIG) acquired an 80% stake in Springleaf (during the right time, it had been American General Finance) from AIG for $125mil.

    Because of the securitization market mainly dried out, there have been concerns regarding just how Springleaf would definitely fund its stability sheet. Numerous debt that is distressed viewed Springleaf financial obligation mostly being a liquidation play, but Fortress clearly saw more.


    The company’s $3bil 6.9per cent coupon senior unsecured records due in December 2017 traded as little as 33 cents regarding the buck in March of 2009. These bonds now trade at a cost of over 109 cents from the dollar, or perhaps a yield of 4.38%.

    After using the business public in October 2013 and attempting to sell a small % of stocks, Fortress continues to be the biggest shareholder at approximately 75%. Wesley Edens, who operates FIG’s equity that is private, is Springleaf’s president.