NEW YORK - The subprime auto finance sector took another hit last week as a major lender, First Merchants Acceptance Corp., disclosed that it is in default to a group of banks and could file for bankruptcy unless new capital can be found.
As of Tuesday, July 8, the company said, it had not been able to secure new financing. First Merchants did not elaborate, but it most likely would file for Chapter 11 protection from creditors while a pay-back plan is devised.
The company, based in Deerfield, Ill., does business in 37 states with dealers and with other lenders.
The First Merchants announcement underscores the increasingly shaky nature of the subprime finance segment, which caters to higher-risk borrowers.
Although major players like Ford Credit are still gearing up to enter the sector, some earlier entries have taken a beating.
In January, for example, Jayhawk Acceptance reported a large fourth-quarter loss because of higher loan-loss reserves. A month later, it filed for Chapter 11.
Jordan Hymowitz, an analyst for Montgomery Securities in San Francisco, estimates that new-car sales could be reduced by 150,000 to 200,000 units this year because subprime credit is drying up.
'It's a great industry, (but) three or four of the top firms are having problems,' Hymowitz said.
In April, First Merchants disclosed 'irregularities' in its financial records and terminated its CEO and three other employees.
It also restated and lowered its reported 1996 earnings, and posted a loss for the first quarter because of an increase in provisions for credit losses.
Meanwhile, the company has been selling assets to raise money.
SCRAMBLE FOR FUNDS
On June 17, First Merchants sold off $9.5 million worth of receivables to Greenwich Capital Financial Products Inc. for $7.6 million, according to documents filed with the Securities and Exchange Commission.
The proceeds were used to pay down a line of credit.
It also securitized $71.5 million of auto receivables in a private placement on June 20, according to the SEC records.
In effect, the company sold the right to collect the income from the receivables. The deal is structured so that investors get paid even if First Merchants declares bankruptcy.
The $71.5 million is divided into two classes of securities.
The largest class, representing about $63 million and backed by an insurance policy, pays investors 6.85 percent.
A smaller set of certificates, representing about $8.6 million without insurance backing, pays 12.25 percent.