Subprime lender AmeriCredit says don't come in, the water is fine

The climate has improved so much for subprime auto lenders that Kyle Birch of AmeriCredit Corp. says he has begun to worry that market conditions could attract more startups in subprime.

Birch is executive vice president for dealer services at AmeriCredit, a leading subprime auto lender based in Fort Worth, Texas.

"As capital becomes more accessible and more reasonable, there's a high likelihood there could be a couple of big startups," Birch said. "There are a lot of customers, and there are a lot of companies out there with funds."

Newbies in the subprime space would be bad for business from AmeriCredit's point of view, assuming that history repeats itself. In the past, newcomers have undercut established players in the pricing of loans.

That contributed to bankruptcies in subprime in the mid-to-late 1990s and another shakeout in the current business cycle.

"The thing I really like about our space, and the companies that are in our space now, is that they are very educated, they know what they have to do to mitigate the risk," Birch said in an interview at last month's NADA convention in Orlando. "I think we're with some very rational competition. You always have to worry about startups."

AmeriCredit is coming back from a period of deep cutbacks and retrenching.

On Feb. 4, in the latest sign of its renewed strength, the company completed the sale of $600 million in asset-backed securities, its third asset-backed deal since July 2009.

That restores access to the bread-and-butter method subprime lenders have historically used to raise funds to make new loans. In securitization, auto lenders sell to investors the income stream from a package of loans. If the loans underperform, the lender has to make up the difference.

"In late 2008 and the first half of 2009, (the company's trouble) has been our availability of funds," he said. "It wasn't the fact that there weren't customers out there."

In addition, AmeriCredit's cost of funds associated with the asset-backed deals dropped from 7.5 percent in July 2009 to 3.7 percent in the latest deal, as additional investors have returned to the market, according to a company report.

"Access to capital," Birch said, "puts us in a position to grow the business."