The subprime auto lending business continues to unravel.

Shares of Olympic Financial Ltd. plunged $2 to $9 Monday, after blistering reports by two analysts; Reliance Acceptance Group Inc. reported a fourth quarter loss of $8.6 million due to an $18 million provision for losses; and Duff & Phelps Credit Rating Co., an agency that has taken the lead in rating securities backed by subprime auto loans, was urging investors to reevaluate the sector.

Until recently, subprime auto lending was a growth business, one that a number of banks were eager to enter. But the sector went into a tailspin last month, after a major player, Mercury Finance Co. of Lake Forest, Ill., disclosed that it had overstated earnings for the past four years.

The downgrades of Olympic were both issued by analysts who had leafed through a prospectus for an $300 million high-yield debt offering planned by the Minneapolis specialty lender.

Oppenheimer & Co. analyst Steve Eisman advised investors to sell the stock. He noted that Olympic has moved downmarket since 1994, when all of its loan were to creditworthy customers.

Today, he said, about 40% of Olympic's loans are subprime credits-and the average size loan the company makes has risen by more than $1,000 to $12,537.

Mr. Eisman said that Olympic's losses will rise, putting it in violation of covenants with its debt holders, and that would result in limits on the amount of new loans it can make.

"To an industry observer, the prospectus reads like a Tom Clancy novel. To an industry participant, it reads more like a Stephen King," said Smith Barney Inc. analyst William H. Ryan.

Mr. Ryan, who said the company is understating delinquencies, repossessions and chargeoffs, picked up coverage of Olympic's stock with an "underperform" rating and a $7 price target.

Olympic insiders are keeping the faith amid the controversy over subprime lending.

Chief executive Richard A. Greenawalt bought a 10,000-share stake in the company on Feb. 7, the day after rival lender Jayhwawk Acceptance Corp. filed for bankruptcy. Chairman Warren Kantor added 17,500 shares to his substantial holding a few days later.

Still, short-sellers, who borrow the shares of troubled companies in hopes of profiting by replacing the shares with cheaper shares when the price drops, were reportedly loading up on Olympic shares last week.

Shares of Reliance Acceptance, meanwhile, surged $2 to $15.25 on news of the loan-loss provision.

Investors, who had been skeptical when the subprime auto lender was broken off from Cole Taylor Financial Group earlier this month, apparently saw the provision as a sign that management was taking steps to address the riskiness of the business.

Meanwhile, Duff analysts were saying that some lenders may be forced out of business because investors won't buy their asset- backed securities.

Duff has a unique perspective. It granted investment grade ratings to 22 uninsured, privately placed subprime auto securitization offerings last year, including 10 from first-time issuers.

Now these securitizations are in trouble, said analyst Reilly Tierney.

If lenders' finances prove so bad they cannot pay their investors, they will likely lose a vital funding source.

"We expect consolidation in subprime auto finance," he said. "But unlike in banking-where banks picked up stressed banks to get more customers-in subprime auto, companies will simply go out of business and others will pick up the slack."

Sudden growth fostered fierce competition for loans that cut into profits and forced lenders to take on worse credit risks, Mr. Tierney said.

Also, subprime lenders often make loans for more than the car is worth.

So if lenders seize a defaulted customer's car, the sale price is often much less than the loan on their books.

"Recovery proceeds are not so high as they used to be," added James K. Damron, another analyst at Duff & Phelps.

In some instances, he said, lenders get as little as 15% of the car's value.

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