- Key Insight: Some 10,000 cars across the country are at the center of the contention as Tricolor's bankruptcy case kicks off.
- What's at Stake: The subprime auto lender's inventory of vehicles may be the best chance for some creditors, including banks, to recoup losses.
- Forward Look: Ensuring that roughly 100,000 auto loans originated by Tricolor continue to be serviced is a top priority, the trustee in the bankruptcy case said.
A Dallas community bank was ready to tow and protect thousands of cars this week, after a borrower's bankruptcy blew up in the faces of dozens of financial institutions.
When Tricolor Holdings filed for Chapter 7 liquidation last week, it left some 60 of lots and garage facilities across six states unstaffed and unsecured. There wasn't a clear path forward for the roughly 10,000 vehicles in Tricolor's possession — inventory which will be key to covering some of the company's hundreds of millions of dollars in debt to creditors.
Triumph Financial, the Dallas community bank, was the agent bank for a $60.5 million loan facility to Tricolor, of which the bank held $23 million. The auto lender's vehicles served as collateral for the debt, meaning that the bank's ability to minimize its losses hinges on keeping Tricolor's cars safe.
The $6 billion-asset bank said in a public filing the day after the bankruptcy filing that it was "working to secure and consolidate its vehicle collateral." It said in a separate filing on Thursday that it had been "providing security guards to monitor certain … locations where significant vehicles were stored." And it moved an undisclosed number of cars.
Triumph's efforts to pool and guard the cars, largely at a Tricolor facility just south of Dallas, were at the bank's own expense, and were blessed by the trustee of the bankruptcy case.
But earlier this week, the trustee requested that Triumph stop moving the inventory.
Now, the trustee wants a third-party loan servicer, Vervent Inc., to take control of both Tricolor's vehicles and its consumer auto loans. On Thursday night, the bankruptcy court held an emergency hearing in an attempt to square away Vervent's responsibilities, as the trustee says it's vital to continue collecting on Tricolor's roughly 100,000 auto loans to consumers.
It's unclear so far how many cars Triumph moved, the trustee's lawyer said Thursday night. Triumph, the parent company of TBK Bank, did not respond to requests for comment.
At the Thursday night hearing, there was contention among several creditors, including Triumph, about who would pay for the consolidation and security of the vehicles if loan servicer Vervent was in control.
The stipulation to allow Vervent to keep the operations running still hadn't been approved as of Friday afternoon.
Tricolor's bankruptcy has resulted in major potential losses for a handful of banks and dozens of other creditors.
The auto lender's woes spiraled quickly in the weeks leading up to its Chapter 7 filing. The issues stem from alleged fraud, which is currently under two parallel Department of Justice investigations.
Fifth Third Bancorp has said that it expects to take some $200 million in losses in connection with the Tricolor mess. Fifth Third CEO Tim Spence said at an industry conference last week that master loan tape, or the data about the borrowers and collateral, was "corrupted," and there were "irregularities" in Tricolor's audited financial statements.
JPMorganChase, the nation's largest bank, may see larger losses than Fifth Third.
But for the smaller banks with exposure to Tricolor, including Triumph, the losses will be even more of a "gut punch," said Janney analyst Chris Marinac.
Origin Bancorp, which has about $10 billion of assets, recently marked $30 million of Tricolor loans as non-accruing. The $27 billion-asset Renasant Bank did the same for $22.5 million of loans.
Losses like that matter for smaller banks, Marinac said, since the expectation is that most of their loans won't exceed $10 million in size.
Marinac said he isn't sure the cars on Tricolor's lots will be enough to recoup much, if any, of those loans, especially if the vehicles are caught in a monthslong legal affair and DOJ investigations.
But Origin and Renasant both said their loans were still performing.
Stephen Scouten, an analyst at Piper Sandler, said that Renasant told him it had "put eyes on the collateral" backing its loans to Tricolor, and it didn't expect outsized losses. He added that the collateral backing those banks' loans is separate from Tricolor's obligations to Fifth Third and other larger banks. Renasant did not reply to a request for comment.
"But you just never know what happens through that bankruptcy process," Scouten said. "And there's going to be a lot of people chasing after ... a lot less collateral than there are obligations."
Still, the strife from Tricolor's bankruptcy is likely a one-off situation, according to most banking analysts. Since the issue was allegedly due to fraud, the subprime auto lender's collapse shouldn't endanger the financial system or the subprime auto sector, analysts say.
"It's a nuisance. It's a gut punch. But they're going to carry on," Marinac said.
