Out of troubled dealership, Hankey built a subprime lender with $1.8B in assets

Roaring Westlake on prowl for its next lion

Out of troubled dealership, Hankey built a subprime lender with $1.8B in assets

Don Hankey wants to replace himself at Westlake Financial Services.
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Don Hankey wants to replace himself at Westlake Financial Services.

Good luck with that.

Now that he has turned 70, after more than 40 years of building the national subprime lender out of the used-car department of his family's struggling Ford dealership, he is turning his attention to recruiting a successor.

Not that Westlake and its parent company, Hankey Group, are short on talent.

"A couple of years ago, we sort of sized up where we stood on management resources. And I'm surrounded by brilliant and talented young people, but most of them are in their 30s," Hankey reports, half complaining and half boasting. "They haven't lived through enough downturns and disappointment yet. We need some more gray hair around here."

If things have gone too well at Westlake, Hankey has himself to blame. His operating mantra is a 30 percent annual return on equity before taxes, and his managing lieutenants appear to keep delivering it.

A 30 percent return, he explains, translates to about a 17 percent after-tax profit, which Hankey finds satisfactory to grow at 20 percent a year. That is what the big boys at the Standard & Poor's 500 typically demand from their companies, he says.

The arithmetic that has built Westlake as a U.S. automotive lender goes something like this: High profits translate to cash, and cash is king for reinvesting to make the company grow. Growth is what Wall Street likes to see. And when Wall Street likes you, Wall Street serves you well by supplying the necessary funds at low interest rates that can be offered to financially challenged car-buyers at higher rates.

And therein lies the business model of Westlake Financial.

Wall Street is enamored with Hankey's performance at Westlake and provides capital at around 2 percent interest. Westlake enables auto dealers in all 50 states to finance customers with spotty credit histories. Those dealers get customers approved with interest rates of 18 to 20 percent. And the margin between 2 and 20 percent enables Westlake to cover all the losses that come from individual loans gone sour while still delivering a 30 percent return on equity.

The time-perfected nuance in all that probably would require a thick Securities and Exchange Commission document to explain. But Hankey has no interest in taking Westlake public.

Big, private


It remains a privately held family business -- and a big one at that.

Westlake works through 15,000 dealerships and is holding loans on about 250,000 vehicle owners. Its assets -- which is how Hankey measures the company's yearly progress -- total $1.8 billion. That figure was around $550 million when the U.S. economy crashed in 2008. Hankey Group has combined assets of $3.3 billion from its various businesses, which include Midway Car Rental and the North Hollywood Toyota dealership in Los Angeles. Its Knight Insurance Group subsidiary alone does about $250 million a year in insurance premiums.

Hankey Group's centralized office in Los Angeles employs about 2,000, of which 1,100 work for Westlake. Another 240 field sales personnel work out of home offices around the country, calling on auto dealers and conducting Westlake business.

Hankey professes that he doesn't "run" all of this. As chairman, he allows the company managers to run their individual businesses. But each component is its own profit center. Westlake is a profit center. Each dealership Westlake serves is a profit center. Each Westlake loan the dealer signs is a profit center.

But for an executive who doesn't actually run the business, Hankey puts in a long day. He drives from his home in Malibu to the office to start each day at 5:45 a.m. He reviews the insurance company's ever-changing stock portfolio in the early hours before Wall Street is busy. He has no secretary, and he lists his direct phone number on the Hankey Group Web site, along with his personal e-mail address. He answers his own phone.

"It hasn't been that bad," he says of granting the world free access to his time. "I will refer questions to the appropriate individual company. But I can be a little abrupt on the phone. If I tell people I'm just too busy, they usually don't call back."

Putting out fires


But it has not been a straight line to success, Hankey makes clear.

He began his career in the late 1960s in investment banking. But his late father had owned a 24 percent interest in the downtown Los Angeles car dealership Midway Ford. And in 1972, Hankey led his widowed mother and his sister to gather up $100,000 and borrow another $250,000 from Ford Motor Credit Co. to buy out the other partners and take full control.

It proved a frustrating experience.

The store was a perennial money-loser and had a negative net worth. Each month brought new setbacks. A car was stolen out of the service department. An employee stole from him. Departments underperformed.

"We went from putting out one fire to putting out another one," Hankey says. "We'd have our meetings with Ford, and they'd ask, 'What went wrong this month?'"

One rep finally said to the young dealer, "You know, Don, I don't really think the car business is for you."

The real problem, Hankey admits, was that he didn't know anything about the business. He asked the factory for all the statistical financial data it could provide, and he read it all. It told him what he had never seen before -- the percentage of gross margin he should expect from each department, based on what all other Ford stores were doing.

Hankey showed the numbers to his department managers and asked them whether they would pledge to meet the factory average -- not exceed it, but simply meet it.

In 1977, five years into his ownership, the store finally turned a one-month profit of $50,000. Within a year, the store turned out a one-month profit of $100,000. By 1979, the store was churning out profits and financing its own floor-planning.

But his path veered in a new direction with the economic downturn of the early 1980s. The recession triggered high lending rates and slow car sales. Financially troubled customers were walking out of Midway Ford without cars because they couldn't obtain loans.

Hankey implemented a system of what he called green accounts. He extended the store's own credit to those customers, and they paid down the purchase in cash installments. When they made a payment, cashiers would record the transaction and put the money into an individual bucket with the customer's name on it.

It was a hit-and-miss concept. Some arrangements failed, and cars had to be repossessed. Some deals were structured imprecisely, and Hankey and his managers had to establish parameters on what a sales manager could and couldn't approve. But the program became a hit with credit-challenged customers around Los Angeles, even to the point that salesmen from competing dealerships began bringing over their own customers to obtain a sale.

"I didn't start doing this to make money on finance," he says. "I did it just to sell cars. My customers were walking out empty-handed. But after a while, it became clear that we were also making money on the finance."

This early version of a buy-here, pay-here sales program was the birth of Westlake Financial. In 1984, two nearby competitors, a Chevrolet store and a Toyota store, asked Hankey to set up similar subprime lending programs at their dealerships. His condition was that the dealers must cover their own losses.

Hankey quickly learned the risk involved with the concept. When handling his own risky customer loans, he could recognize and account for a bad loan. But when presenting other dealers with the bill for losses from a bad loan, they resisted. They wanted to cover last month's losses with next month's expected profits, meaning they didn't want to write Hankey a check.

Hankey altered the plan with a stunning proposal: He would cover all losses at the other dealerships. But he would structure the lending in such a way that he would make enough profit to pay for their losses if and when they occurred.

This is essentially the same arrangement that Westlake now has in place at dealerships all over the country.

Thirty years later, Hankey is massaging and shaping the business concept. He spent two years working with Toyota Motor Corp. in the United States on a proposal to become Toyota's in-house subprime supplier.

Toyota ultimately declined the idea, but now Westlake has partnered with Hyundai Motor Co. and begun providing the service to its U.S. dealer body.

Hankey also survived the economic crash of 2008 with surprising dexterity.

After Westlake's lines of credit were cut off in 2008, just like many other lenders around the country, the company began operating at a loss. Hankey stepped in with $90 million of his personal wealth to plug the holes and immediately began discussions with outside equity firms to take part ownership of the company.

The firm he settled on was Japanese investment and trading company Marubeni Corp., a low-key silent partner in various U.S. businesses.

However, by the time the Marubeni deal could be finalized, Westlake no longer needed the investment.

"But we had really grown to like the Marubeni people by then," Hankey says. "We liked their culture. And so we decided to go ahead and bring them in as partners."

In 2011, Marubeni paid $250 million to obtain a 20 percent share of the Los Angeles company. Maru-beni dispatched two managers to work inside Westlake's offices -- Westlake pays for one salary and Marubeni for the other -- and they both sit amid 200 Westlake employees. Hankey has private 6 a.m. meetings with one of the managers to keep him up to date and exchange ideas.

Changing landscape


The subprime competitive landscape continues to change. A number of Westlake's subprime competitors have been acquired in recent years in apparent anticipation of new market activity. The investment firm Blackstone Group acquired Exeter Finance, and General Motors acquired subprime lender AmeriCredit, renaming it GM Financial.

Last year, the large Canadian lender Carfinco Financial Group acquired Persian Acceptance Corp. of Massachusetts. Carfinco also had announced its plan to acquire the assets of Western Funding Inc. of Las Vegas out of Chapter 11 bankruptcy late last year. That plan was thwarted when Hankey led Westlake to outbid Carfinco for Western.

"A lot of new money has come into subprime in the last year," Hankey notes. "It's going to be important to be strong and profitable."

More stringent U.S. banking regulations are coming, including the so-called Basel III, the U.S. version of the bank-strengthening rules proposed by Europe's Basel Committee on Banking Supervision. That will make it more difficult for federally insured U.S. financial institutions to participate in risky consumer loans. And as a result, lenders not federally insured, including Westlake, likely will reap the opportunity of a growing subprime market.

"The banks are in a difficult situation now," Hankey says. "They're limited in where they can lend money. But people will always need subprime loans for cars. And there will continue to be a need for a company like Westlake Financial."

You can reach Lindsay Chappell at lchappell@crain.com.

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