Subprime Auto Lender'sBailout Plan Hits a Pothole

First Merchants Acceptance Corp. is facing bankruptcy as its lenders cut their connection to subprime auto finance.

The troubled subprime auto lender's financial bailout package failed to materialize Thursday after its new lender, Greenwich Capital Markets Inc., decided to pull out.

That means the company, whose loan agreement led by Chicago-based LaSalle National Bank, expired June 30, is fighting for its life.

"The banks have said, 'This is as far as we're going to go,' so they've got a real liquidity crunch," said Daryl Leehaug, analyst at Duff & Phelps Credit Rating Co.

The Deerfield, Ill.-based lender announced Monday that it had defaulted on its loans, had been unable to find replacement financing, and its bank group had "ceased honoring checks."

In a press release, the company said it "continues to explore other sources of financing, but may seek protection under the U.S. Bankruptcy Code." First Merchants officials were unavailable for comment.

Trading of First Merchants' stock was suspended Thursday by Nasdaq for the second consecutive day pending further news from the company.

If First Merchants files for bankruptcy, it would be the second lender in this rapidly deteriorating sector to do so. Jayhawk Acceptance Corp. filed for Chapter 11 bankruptcy protection in February after its primary lender, Fleet Financial Group, withdrew support.

First Merchants' problems began in April, when it announced that "irregularities involving unauthorized entries made in the company's financial records" had been discovered. The company fired its chief executive, Mitchell C. Kahn, and three other employees.

But after that debacle, the company seemed to be getting on its feet.

In May, First Merchants announced that it had arranged a $200 million financing package from Greenwich Capital to replace the money it was getting from banks.

Greenwich Capital, a unit of Natwest Group, is an investment banking boutique that has provided financing to several other subprime auto lenders, including Aegis Consumer Funding Group Inc. and NAL Financial Group Inc.

People familiar with the situation say the deal was never finalized because Financial Security Assurance Inc., which insures securitizations for First Merchants and most other subprime auto lenders, was unwilling to act as guarantor for First Merchant's bailout package.

And other problems within subprime auto finance may have caused Greenwich to think twice. A portion of the asset-backed securities the investment bank underwrote for Aegis were the first subprime auto securities to be downgraded by Moody's Investors Service this spring because of deteriorating credit.

And last quarter Greenwich was unable to sell about $80 million worth of asset-backed securities originated by Fort Lauderdale, Fla.-based NAL Financial, a subprime auto lender so riddled with rising losses that it has hired ABN Amro Chicago Corp. to advise on financial alternatives. Greenwich eventually repackaged the securities and last week was able to complete the sale.

Greenwich officials declined to comment.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER