TFC Enterprises Inc. is the latest subprime auto lender to crack up while hurtling down the road of excessively fast growth. Analysts fear it will not be the last.
TFC, based in Norfolk, Va., surprised the industry last week by announcing it expects to report a fourth-quarter loss of about $12.5 million, resulting in a loss of some $7 million for the full year.
Conceding that it was in technical default on its credit agreements with two major lenders, TFC said in a statement that it was holding talks with them on "alternatives to address its liquidity needs."
The company cited "significant deterioration" in its receivables portfolio, requiring a massive ratch-up in its loan-loss provision, to $25 million from $1.3 million at Sept. 30.
TFC first reported credit problems in the third quarter but suggested that company officials had the situation under control.
"I don't think anybody expected a loss of this magnitude," said Wheat First Butcher Singer analyst David C. Stumpf.
The problems at TFC represent just the latest episode in a rash of badnews to hit companies that specialize in making auto loans to credit- impaired customers. Others reporting rising credit losses or earnings setbacks include General Acceptance Corp., Eagle Finance Corp., Olympic Financial Ltd., MS Financial Corp., and Monaco Finance Inc.
"The way a lot of companies were approaching this business was a recipe for disaster," said Joseph A. Jolson of Montgomery Securities. "In their drive to grow rapidly, they sacrificed credit quality for growth. They didn't take into account that things change and there are business cycles."
TFC appears to be a case in point. After raising $50 million in an initial public offering underwritten by Wheat First, the company expanded from its Norfolk headquarters to open new service centers in Jacksonville, Dallas, and San Diego.
While most subprime lenders operate small branches around the country that deal directly with local dealers, TFC purchases its auto paper in bulk and then monitors and collects on the credits from centralized, highly automated service centers.
No TFC officials could be reached for comment. But analysts said the company lost control of its underwriting standards, particularly in the two major expansion areas of Florida and Texas.
"Very aggressive lending is what happened at TFC," said Wheat First's Mr. Stumpf. "They were not pricing their paper correctly. They also probably underestimated the servicing requirements of civilian credits relative to their historic military business."
For most of its two-decade existence, TFC had focused on serving military personnel at the Norfolk naval base. Although subprime lending is, by definition, highly risky, TFC kept its credit quality under control by deducting a serviceman's installment payments directly from his monthly paycheck.
The automatic deduction is not permitted with civilian borrowers, who now represent two-thirds of TFC's portfolio.
The company's future is clouded. As a result of its credit problems and anticipated losses, the company has fallen into technical default on credit agreements with its two major lenders, NationsBank Corp. and GE Capital Corp.
TFC said in a statement that it's "currently in discussions with its lenders to resolve the out-of-compliance situations and is exploring alternatives to address its liquidity needs."
Mr. Stumpf said he doubted the two creditors would call in their loans, which amount to $50 million in the case of NationsBank and $60 million for GE Capital.
"I fully expect the lenders to work with TFC to develop a plan to get them back into compliance," Mr. Stumpf said. But he added that the renegotiated loans.
