Private-equity fund Fortress Investment Group on Tuesday made the kind of deal it likely envisioned when it bought AIG's subprime lender.
HSBC Finance has agreed to sell a portfolio of personal unsecured loans and homeowner loans for $3.2 billion to a joint venture of Springleaf Finance and Newcastle Investment. Springleaf was formerly called American General; Fortress bought an 80% stake in the company three years ago and American International Group still owns 20%. Newcastle is a real estate investment trust managed by Fortress.
The deal fits squarely into Fortress' game plan, observers say.
"When they bought American General, part of the strategy was to take advantage of [consumer finance] opportunities that everyone else was selling," says Leigh Allen, founder of Global Consumer Finance Advisory, who was not involved in the deal. "Banks likely can't do deals like this because the optics aren't good - chargeoff rates are higher and it is perceived to be risky. But someone like Fortress, with this platform, is uniquely positioned to do it."
However, the timing of the deal was surprising when it comes to Springleaf. The lender said in filings with the Securities and Exchange Commission in November that it had significant indebtedness and its liquidity position was being negatively affected by "historically unfavorable conditions in the consumer finance industry, the residential real estate market and the capital markets."
In the same filing, the company said it had adequate liquidity to operate its business and pay its bills in the coming year but would need to generate liquidity to meet its debt payments in 2014.
Allen says the deal could serve as a way for Springleaf to attract some much needed liquidity, perhaps by using the new assets as a source of collateral.
"We are guessing here, but there are probably a lot of corporate finance lenders who are interested," Allen says. "Corporate finance, while they are being careful, has plenty of money to put to work and not a lot of opportunities."
Springleaf and HSBC declined to comment beyond press release, Newcastle did not return a call for comment and Fortress redirected requests for an interview to Springleaf.
The deal calls for Springleaf to be the servicer on the more than 400,000 loans that range from second liens to financing of items such as televisions.
It could help Springleaf deepen its consumer finance relationships, says David Tobin, a principal at Mission Capital Advisors, a New York loan advisory firm. The demand for such products is high given the economic environment, but the pool of lenders has shrunk.
"I'm not sure how many big national consumer lenders there are left. Maybe Springleaf ends up being the last man standing," Tobin says. "I do think there is a return of financing on a corporate basis for consumer loans. [Springleaf is] filling a void that has been growing."
The price tag of the deal, 76 cents on the dollar for $4.2 billion of loans, reflects a business that is high risk and high reward, Tobin says. Consumer loans typically have low recoveries. Additionally, Tobin says, the pricing also likely reflects a portfolio that has credits of varying quality.
"They could be paying 1.05 for the high-yielding performing ones, but 50 cents for the subperforming group and a few cents for anything nonperforming," Tobin says.
For HSBC, the deal is the latest in a string of divestitures in the United States, as HSBC Holdings, one of the largest banks in the world and based in London, realigns itself. It completed the sale of its U.S. credit card unit to Capital One Financial (COF) for a premium of $2.5 billion in May.
"HSBC has some fantastic businesses around the world and consumer finance in the U.S. is lower on the totem pole compared to stuff they are doing in Asia and Latin America," Tobin says.
The deal announced Tuesday "accelerate[s] the runoff of the legacy consumer mortgage and lending business and are a continuation of HSBC's strategy to reposition its U.S. operations and focus on the core businesses supporting our aim to be the world's leading international bank," Patrick Burke, chief executive of HSBC Finance, said in a press release.