AutoNation slowly integrates captive CIG Financial

Dealership group AutoNation Inc. is slowly integrating its recently acquired CIG Financial into the company.

AutoNation in October purchased Irvine, Calif.-based auto finance company CIG Financial for $85 million.

Glenn Chin, senior equity analyst at Seaport Research Partners, said CIG is not yet integrated in AutoNation's new-car dealerships but is active in the group's AutoNation USA standalone used-car stores.

In February, AutoNation CEO Mike Manley said the group was to restart a finance company as a source of profits and strategic advantage as it grew its used-vehicle business.

"I think it's important for the largest automotive retailer in the country to be able to offer finance through a captive where we can tailor-make services, where we can make sure that the relationships that we build with our customers are deep, where we can be flexible to make sure that we account for different cycles, different changes in buying habit," Manley said on an earnings call at the time. "So I am strongly in favor of that."

Captives are typically profit centers for automakers, though Fiat Chrysler, which Manley led as CEO for two and a half years, didn't have one.

AutoNation used to have a finance unit, but it was losing money when then-CEO Mike Jackson pulled the plug in 2001. It considered restarting a captive finance company in 2014, but a year later dropped the plans with Jackson citing cost, return on investment, scale and competition as the reasons against it.

Starting a captive from scratch is extremely costly. Other hurdles include staffing needs, acquiring state lending licenses and investors' reluctance to buy bundles of auto loans until a lender establishes a history.

For those reasons and others, it makes sense for a national group to turn an existing lender into a captive.

"The plan is to be very deliberate and slow with the growth," Chin told Automotive News of AutoNation's plans for the captive.

"It will grow with AutoNation USA. They don't expect [CIG Financial] to be material until 2024."

A captive finance company can be a great growth-driver, Chin points out, just as it is for publicly held used-car retailer CarMax. The CarMax Auto Finance arm provides as much as 40 percent of CarMax's total income.

But Chin pointed out that although a captive has the potential to drive additional used-car sales by offering financing to customers with lower credit scores, this can pose a risk — especially because U.S. auto loan delinquencies are on the rise.

"Investors don't like to see that," Chin said.

Lithia Motors started its captive finance company, Driveway Finance Corp., in 2011. According to Chin, Lithia is growing Driveway quickly, and CarMax Auto Finance, which has been operating for about 30 years, is on track to generate about $800 million in income this year.

"Consumer credit has been very strong," Chin said. "Losses and delinquencies have been unusually low. We're at the point in the cycle where all that is set to normalize.

"For CarMax, the concern is they're overearning. The concern about Lithia is they are building up their captive finance arm at the same time that expectations are that we're heading to the downside of a credit cycle."

Penske Automotive Group CEO Roger Penske has been asked about adding a captive but would only say they've had "opportunities" to do so and might "at some point, maybe."

Asbury Automotive Group CEO David Hult said last winter that Asbury was "in the really early stages" of studying whether to add a captive.

AutoNation ranks No. 1 on Automotive News' list of the with 262,403 in total new retail units sold last year. Lithia ranks No. 2 on the list with 260,738 new retail units sold last year.