Despite having lost its majority investor, City Auto Resource Services says it is moving ahead with its innovative auto financing framework.
The subprime auto finance company, based in West Palm Beach, Fla., last week repurchased all five million shares owned by Cityscape Financial Corp., eliminating Cityscape's only exposure to the subprime auto business.
But City Auto is "not worried in the least" by the departure of the major backer, a company spokesman said. "There's no lack of investor interest in the stock."
City Auto is arranging financing with an undisclosed lender to let it rev up loan production, the spokesman said. It had been understood that Cityscape would provide this financing.
City Auto, which was formed last June, has a "whole different recipe" for subprime auto lending, according to chief operating officer Kevin Baumann.
The company's founding shareholders include 12 automobile dealerships which own 116 franchises in 11 states. Together these shareholders book about $225 million in subprime auto contracts annually. Before the repurchase from Cityscape, these dealers and City Auto management held 17% of the company's shares between them.
City Auto has hammered out first-refusal agreements with the dealers meant to let the financier evaluate loans written at any of these franchises before any other lender.
"It's a built-in source of product," said the City Auto spokesman. The combination of competitive rates and dealer investment should assure that City Auto captures a large portion of the loans booked, he added.
Getting the company off the ground is taking time. Although City Auto officially went public with a listing on the over-the-counter bulletin board in June, it did not start booking loans until Jan. 1. Volume is negligible so far, the spokesman said.
In March the company signed an agreement with subprime loan acquirer Monaco Finance Inc., Denver. Monaco will evaluate and service City Auto's loans.
The company's "intriguing" business model eliminates one of the worst problems in subprime auto finance, said rating agent Riley Tierney of Duff & Phelps Credit Rating Co..
City Auto will have the opportunity to cull the best loans from the 116 franchises, he said, rather than have to lower underwriting standards to compete with other lenders for loans.
The timing, in the wake of the recent disasters that have befallen several subprime auto lenders, "may be a little challenging," Mr. Tierney acknowledged. But he said the business model "deserves a hearing from the investment community."
