2 Specialty Lenders Make a Splash By Meeting Needs of Refinancers

A pair of specialty lenders, capitalizing on consumers' need to refinance, have turned heads on Wall Street in a hurry after going public this year.

Growth in the market capitalization and share prices of RAC Financial and Imperial Credit Industries as of Sept. 30 put them among the top mortgage companies and finance companies listed in American Banker's Market Monitor.

The market value of RAC Financial, which made its market debut last February, has surged past the half-billion dollar mark - last week it stood at over $534 million. That puts it well into the neighborhood of industry heavyweights like Greentree Financial, Money Store, and Aames Financial Corp.

In the process, the share price of the Dallas-based specialty finance company - which is controlled by FirstPlus Financial - soared to $47.50 last week, from its offering price of $18 eight months ago.

The market views RAC Financial as a top player in home improvement and debt consolidation, said analyst Michael K. Diana of Bear, Sterns & Co., which helped the company go public.

It makes second mortgages for the entire value of the home - known as high loan-to-value debt consolidation lending.

Mr. Diana expects RAC Financial's earnings momentum to continue. "By the year 2000, Americans are going to be spending $200 billion annually to improve their homes," he said, citing a recent U.S. Census Bureau report.

He asserted that the company is less susceptible than others to loan quality problems because of its refined credit-scoring techniques.

Analyst Dean P. Eberling of Prudential Securities, who has a "buy" rating on RAC Financial, projects its earnings growth to increase by 40% in fiscal 1997 ending next September. But he noted that the company is undervalued compared to its peer group.

Most specialty finance companies trade at 13 times next year's earnings, but RAC Financial trades at less than 10, he argued in a recent report.

The market capitalization of Southern Pacific Funding Corporation - which was spun off of Imperial Credit - climbed to a remarkable $420 million as of Oct. 24, from $227 million during its initial public offering in June, said analyst James Bradshaw of Pacific Crest Securities.

The shares of the Lake Oswego, Ore., finance company surged to $31.375 last week, nearly double their initial offering price of $17.

"They're expanding their origination focus and trying to get into wholesale and retail production," Mr. Bradshaw said. "They are also capturing market share in the fastest-growing sector in the mortgage industry, which is subprime mortgage."

Analyst Joseph Jolson of Montgomery Securities, San Francisco, noted that the firm has outperformed its peer group.

"Their earnings outlook is substantially above what they earned last year when they went public," he said. "They made $6.5 million last year and are expected to earn $24 million this year."

He pointed out that Southern Pacific's nonperforming assets are also under 4%, while those of other subprime lending companies are 5% to 6%.

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