Initial public offerings of subprime automobile finance companies may be skidding to a halt because of consumer-credit concerns.
There hasn't been an IPO since July, and analysts doubt they'll see any more this year.
The companies, which serve less creditworthy buyers, were once among the darlings of momentum investors. But their shares have plunged as much as 88% since their market debuts. "Auto finance IPOs are slowing down due to a ripple in the consumer credit quality," said investment banker Adam Hitt of Alex. Brown & Sons, Baltimore.
Six subprime auto lenders have gone public so far this year; the 1995 total was nine.
Of the 19 auto finance companies to go public in the past three years, seven are trading below their initial prices - four by more than 50% - Mr. Hitt noted in a recent report.
"Since the beginning of the year, the sector has been out of favor," said Mr. Hitt, who presented his findings Sept. 18 at an auto lending conference. "The entire auto finance group underwent a re-rating. Where they once had price-to-earnings multiples of 20, they have gotten chopped by 40% or 50%."
Among the biggest losers is TFC Enterprises of Norfolk, Va. TCF stock, first offered last Dec. 12 at $11.50, had plunged 88% by midday Friday to $1.375. .
Shares of MS Financial have declined 74% since July 21, 1995, when the Ridgeland, Miss., company went public. Initially offered at $12, MS stock traded Friday at $3.125.
Western Fidelity Funding Inc. has plummeted 52% since the offering last November. Shares of the Denver-based company were initially priced at $6; they traded Friday at $2.875.
Mr. Hitt noted that initial public offerings of subprime auto finance companies were booming in the early 1990s. During that time the sector raised more than $1 billion in equity through initial and secondary offerings.
But with about 24 publicly traded companies, he doubts any more will go public soon.
"There is not a need for additional small auto finance companies," said Mr. Hitt. "Investors don't see the point in putting in more money when there are already too many companies to choose from.
"Someone has to build a better mousetrap before investors get excited again."
Unlike the subprime mortgage finance companies whose stock prices have recovered, many investors in the subprime auto finance companies remain skittish.
"Mortgage subprime companies have bounced back but these guys haven't," said one analyst, who declined to be identified. "I wouldn't expect any more auto IPOs, but I do expect more home finance company IPOs."
Some auto finance companies have been able to outpace their peers.
Stock of First Merchants Acceptance Corp., Deerfield, Ill., has risen 83% from its public offering in September 1994. First Merchants shares, which were offered at $11, were trading Friday at $20.125.
And Oxford Resources Corp. of Melville, N.Y., has climbed 119% since its initial offering in December 1993. Oxford stock, initially priced at $10, traded Friday at $21.875.
Michael Foster, a portfolio manager with Society Hill Capital in Philadelphia, said he expects more auto finance companies to go public. "The downturn is cyclical," he said. "This is an immensely growing market."
