bro_t_pro

CACC: Recent Events Add to the Short Thesis

Jackson,
You have presented an interesting perspective on viewing the potential funding hurdles that a company such as CACC may indeed face. However, I feel that you may not understand the operational side of CACC's business as well as you understand the financial perspective. CACC does not merely "purchase" dealer contracts at a slight discount. The majority of CACC dealer contracts purchased, are in fact purchased "with recourse". In essence, the contracts are not really purchased, they are serviced or collected by CACC's collection department, and the dealer is paid an "advance" which represents a discount of between approximately 15-50%. The dealer advance is repaid to CACC as the payments for the auto loan are made. The advance becomes a "purchase" when enough payments are made on the loan (based on an 80/20 split) to pay back the dealer advance. In addition, the dealer receives an additional incentive after this "breakeven point" because he/she stands to receive an additional 20% if the entire contract is paid in full. This is why CACC uses SOP 03-3.
I am a firm believer that this is one of the nuances that sets CACC apart from other subprime lenders in the automobile finance industry. I believe that Wachovia understands this is as well. Further, I don't think comparing a commercial mortgage lender like Gramercy Capital makes any sense at all here. Obviously, given the turmoil in the mortgage finance sector over the last 14 months, any mortgage lender is going to be put under the microscope by his banker. If anything, with GMAC and Ford Motor Credit doing away with lease financing, more consumers will be forced to purchase used cars, and that is right up CACC's alley. I have been a recent (as well as small < 1000 shares) buyer, due to my belief that recessionary times are bullish time for CACC and their collection rates are consistently 20-30% above average dealer advance ratios. I think you should cover your position if you have one.