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Based in Dallas, TX, Santander Consumer USA Holdings (NYSE:SC) scheduled a $1.5 billion IPO on the NYSE with a market capitalization of $8 billion at a price range midpoint of $23 for Thursday, January 23, 2014. Moved to Thurs from Fri, that's a positive sign.

Update Jan 22. Price range raised to $24-$25, size upped to 75 million shares from 65 mm shares. Additional shares also go to selling shareholders, that's a negative.

SC is one of three IPOs scheduled for the week of January 20, 2013. The full IPO calendar can be found at IPOpremium.

SEC Documents

Manager, Joint managers: Citi, J.P. Morgan, BofA Merrill Lynch, Deutsche Bank, Santander, Barclays, Goldman Sachs, Morgan Stanley, RBC Capital Markets, BMO Capital Markets, Credit Suisse, UBS Investment Bank, Wells Fargo Securities

Co-Managers: KKR, Sandler O'Neill, Stephens Inc., LOYAL3 Securities

End of lockup (180 days): Thursday, July 24, 2014

Summary
SC is a full-service, technology-driven consumer finance company focused on vehicle finance and unsecured consumer lending products.

In February 2013, SC entered into a ten-year agreement with Chrysler whereby SC originates private-label loans and leases under the Chrysler Capital brand.

With this agreement, SC is now the preferred financing provider for all of Chrysler's retail consumers, including both prime and nonprime customers.

For the three months ended September '13 vs September '12, revenue increased to $1011 million from $745 million, net income declined to $112 million from $212 million, because loan loss provisions increased to 44% of revenue from 33% of revenue.

Simply stated, SC added too many poor credit risks. For calendar 2013 vs 2012, SC expects income to decline to $697 from $715.

Red flag: 100% of the IPO proceeds are from selling shareholders, and 82% of the IPO proceeds are going to very sophisticated private equity investors who are bailing.

Which begs the question: what do they know that we don't?

Valuation

Glossary

On a comparative basis
. SC's yield is the highest
. SC's book value is the same as Capital One's
. SC's September '13 nine months annualized P/E ratio is the same as Discover Financial's.

SC is priced in range except SC's yield is the highest.

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

Cap (MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Santander Consumer USA Holdings

$7,981

3.1

3.3

19%

Annualizing Sept qtr

2.0

18.0

Annualizing Sept 9 mos '13

2.2

10.2

2013 yr estimate

11.5

Conclusion
In spite of the negatives, it is likely investment bankers will price the IPO so that it will edge up in the aftermarket.

The rating is neutral to positive. But why are the sophisticated private equity sponsors bailing?

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business
Founded in 1995, SC is a full-service, technology-driven consumer finance company focused on vehicle finance and unsecured consumer lending products.

SC has achieved strong brand recognition in the nonprime vehicle finance space.

SC originates loans indirectly through manufacturer-franchised and selected independent automotive dealers, as well as through relationships with national and regional banks and OEMs.

SC also directly originates and refinances vehicle loans online.

News links
US Market: Global auto sales forecast rosy, with reservations, for 2014, Reuters, Jan 12

Ally Receives Fed Approval for Financial Holding Company Status
Approval Allows Ally to Engage in Broader Range of Business Activities, WSJ Dec 23

Reason for SC's bad September '13 quarter
Provision for loan losses on SC's individually acquired retail installment contracts increased $204 million, or 84%, from the third quarter of 2012 to the third quarter of 2013, driven by faster portfolio growth.

Provision for loan losses on individually acquired retail installment contracts increased $391 million, or 57%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013, driven by faster portfolio growth.

SC's portfolio of individually acquired retail installment contracts grew by 14% and 47% for the three and nine months ended September 30, 2013, respectively, up from 9% and 32% for the three and nine months ended September 30, 2012, respectively, due to the higher current year origination volume, primarily driven by Chrysler Capital business.

SC's net charge off rate increased from prior year due to increased competition having made it more difficult for lenders, including us, to price for incremental risk.

Chrysler Capital
In February 2013, SC entered into a ten-year agreement with Chrysler whereby SC originates private-label loans and leases under the Chrysler Capital brand. With this agreement, SC is now the preferred financing provider for all of Chrysler's retail consumers, including both prime and nonprime customers.

SC executed an Equity Option Agreement with Chrysler, whereby Chrysler may elect to purchase an equity participation of any percentage in the Chrysler Capital portion of SC's business at fair market value.

Under the Chrysler Agreement, SC agreed to specific transition milestones related to market penetration rates, approval rates, dedicated staffing, and service-level standards for the initial year following launch.

If the transition milestones are not met in the first year, the agreement may terminate and SC may lose the ability to operate as Chrysler Capital. Subsequent to the first year, SC must continue to meet penetration and approval rate targets and maintain service-level standards or the agreement can be terminated.

Penetration targets
Penetration rate targets, which are cumulative rates measured as of the end of each year of the Chrysler Agreement (April 30), for years one through five of the Chrysler Agreement are 31%, 44%, 54%, 64% and 65%, respectively.

During the period from the May 1, 2013 launch of the Chrysler Capital business through November 30, 2013, SC originated over $6.7 billion of Chrysler Capital retail installment contracts and over $2.0 billion of Chrysler Capital vehicle leases, resulting in a penetration rate of 26.5% as of November 30, 2013. SC expects to meet and exceed the penetration rate target for year one of the agreement.

SC expects these volumes to continue and that it will achieve the targets in the Chrysler Agreement..

More loans are prime rather than subprime
From May 1, 2013, the effective date of the agreement, through September 30, 2013, 30% of SC's retail installment contract origination volume has been prime, as compared to only 14% in 2012, the last full year prior to its entry into the agreement.

In addition, SC has several relationships through which it provide unsecured consumer loans, and SC recently expanded into private label credit cards and other consumer finance products.

Revenue generation
SC generates revenues and cash flows through interest and other finance charges on loans and leases. SC also earns servicing fee income on loans serviced for other portfolios, which consist of loans that SC services but does not own and does not report on its balance sheet.

SC's originations are sourced through many different channels, and it continues to grow its network of relationships in order to maximize its opportunities for growth. SC's technologically-driven platform has enabled it to add more than $34 billion of assets to its lending platform since 2008, and SC continues to evaluate opportunities for additional acquisitions.

Moreover, SC services loans for others, which provides it with an additional and stable fee income stream.

Franchised autodealers
Historically, SC has originated loans primarily through franchised automotive dealers for manufacturers such as Chrysler, Ford, General Motors, and Toyota in connection with the sale of new and used vehicles to retail consumers.

SC currently has active relationships with over 14,000 such dealers throughout the United States. In February 2013, SC entered into a ten-year agreement with Chrysler Group LLC ("Chrysler") whereby SC originates private-label loans and leases under the Chrysler Capital brand ("Chrysler Capital") to facilitate Chrysler vehicle retail sales.

Management team
Led by its experienced and disciplined management team, SC has rapidly grown its asset base since 2008 through originations and acquisitions without having to significantly invest in new infrastructure or compromise its credit performance.

Dividend
Following the completion of this offering, SC currently intends to pay dividends on a quarterly basis at an initial amount of 15 cents per share, which is an annual rate of 2.6% at a price range mid-point of $23.

Competition
The automotive finance industry is highly competitive.

SC competes on the pricing it offers on its loans and leases as well as the customer service SC provides to its automotive dealer customers.

Pricing for these loans and leases is very transparent. SC, along with its competitors, posts its pricing for loans and leases on web-based credit application aggregation platforms.

When dealers submit applications for consumers acquiring vehicles, they can compare SC's pricing against its competitors' pricing.

Dealer relationships are important in the automotive finance industry. Vehicle finance providers need to tailor product offerings to meet each individual dealer's needs.

SC believes that it can effectively compete because its proprietary scorecards and industry experience enables it to price risk appropriately.

In addition, SC benefits from Chrysler subvention programs through the Chrysler Agreement. SC has developed strong dealer relationships through its nationwide sales force and long history in the automotive finance space. Further, SC expects that it will be able to deepen dealer relationships through its Chrysler Capital product offerings.

SC's primary competitors in the vehicle finance space are: national and regional banks; credit unions; independent financial institutions; and the affiliated finance companies of automotive manufacturers.

5% stockholders
DDFS LLC: 9.98% Santander Holdings USA, Inc.: 65%
Sponsor Auto Finance Holdings Series LP: 25%*
Thomas G. Dundon: 12%
*owned by funds managed by Centerbridge Partners, L.P., Kohlberg Kravis Roberts & Co. L.P., and Warburg Pincus LLC, which will see sell 62% of their holdings - this is a clear private equity bailout.

Use of proceeds
100% of the IPO proceeds go to selling stockholders.

Private equity firms will receive 82% of the (bailout) IPO funds, including Centerbridge Partners, L.P., Kohlberg Kravis Roberts & Co. L.P., and Warburg Pincus LLC.

And the September 2013 quarter income was down -47% from the September 2012 income, even though revenue was up 36%.

SC's earnings estimate for 2013 is $697 million, down from $715 million in 2012.

Is something wrong with this picture? A private equity bailout just after a really bad quarter.

Disclaimer: This SC IPO report is based on a reading and analysis of SC's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Santander Consumer USA Holdings