Investors place big bets on Buy Here Pay Here used-car dealers
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| J.D. Byrider, a chain of 135 Buy Here Pay Here dealerships, was acquired in May by the private equity firm Altamont Capital Partners of Palo Alto. Above, the J.D. Byrider lot in Visalia, Calif. (Kirk McKoy, Los Angeles Times / October 13, 2011) |
By Ken Bensinger, Los Angeles Times November 1, 2011
Second of three parts
The J.D. Byrider used-car dealership in Visalia, Calif., sits amid a jumble of tow yards, hubcap vendors and vacant lots littered with empty beer cans. It may not look like much, but selling aging cars to waitresses, secretaries and farmworkers is a lucrative business. That's why private equity firm Altamont Capital Partners of Palo Alto bought the J.D. Byrider chain in May for a reported $50 million.
Altamont's offices, on the 10th floor of a luxury office tower overlooking Stanford University, are 200 miles and a world away from the Visalia lot.
On a recent morning, a dozen executives could be seen huddled in a glass-walled conference room, reviewing a slide presentation on plans to buy some franchised Byrider lots. It's part of a strategy to boost profit at the 135-lot chain, which had sales of $740 million last year.
Firms like Altamont pride themselves on being the smart money, identifying profitable opportunities ahead of the herd. Lately they and other investors are finding just such a windfall in a little-noticed niche of the used-car business known as Buy Here Pay Here.
These dealerships focus on people who need cars to get to work, but can't qualify for conventional loans. They sell aging, high-mileage vehicles at prices well above Kelley Blue Book value and provide their own financing. As lenders of last resort, they can charge interest at three times or more the going rate for regular used-car loans.
Many require customers to return to the lot to make their loan payments — that's why they're called Buy Here Pay Here dealerships.
If buyers default, as about 1 in 4 do, the dealer repossesses the cars and in many cases sells them again.
The dealerships make an average profit of 38% on each sale, according to the National Alliance of Buy Here Pay Here Dealers. That's more than double the profit margin of conventional retail car chains like AutoNation Inc.
"The amount of return from these loans you can't get on Wall Street. You can't get it anywhere," said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. "It's the gift that keeps giving."
Investor money is pouring into the industry from several sources, helping Buy Here Pay Here dealers expand their reach and raise their profile.
In addition to private equity firms such as Altamont, several payday lending chains are moving into Buy Here Pay Here and have acquired dealerships.
Stock investors are snatching up shares in Buy Here Pay Here chains and other publicly traded companies in the business. Two of the biggest, America's Car-Mart Inc. and Credit Acceptance Corp., have seen big gains in their share prices this year, outpacing the market.
Buy Here Pay Here is also being boosted by one of the sophisticated financial strategies that drove the nation's recent housing boom and bust: securitization.
Altamont's offices, on the 10th floor of a luxury office tower overlooking Stanford University, are 200 miles and a world away from the Visalia lot.
On a recent morning, a dozen executives could be seen huddled in a glass-walled conference room, reviewing a slide presentation on plans to buy some franchised Byrider lots. It's part of a strategy to boost profit at the 135-lot chain, which had sales of $740 million last year.
Firms like Altamont pride themselves on being the smart money, identifying profitable opportunities ahead of the herd. Lately they and other investors are finding just such a windfall in a little-noticed niche of the used-car business known as Buy Here Pay Here.
These dealerships focus on people who need cars to get to work, but can't qualify for conventional loans. They sell aging, high-mileage vehicles at prices well above Kelley Blue Book value and provide their own financing. As lenders of last resort, they can charge interest at three times or more the going rate for regular used-car loans.
Many require customers to return to the lot to make their loan payments — that's why they're called Buy Here Pay Here dealerships.
If buyers default, as about 1 in 4 do, the dealer repossesses the cars and in many cases sells them again.
The dealerships make an average profit of 38% on each sale, according to the National Alliance of Buy Here Pay Here Dealers. That's more than double the profit margin of conventional retail car chains like AutoNation Inc.
"The amount of return from these loans you can't get on Wall Street. You can't get it anywhere," said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. "It's the gift that keeps giving."
Investor money is pouring into the industry from several sources, helping Buy Here Pay Here dealers expand their reach and raise their profile.
In addition to private equity firms such as Altamont, several payday lending chains are moving into Buy Here Pay Here and have acquired dealerships.
Stock investors are snatching up shares in Buy Here Pay Here chains and other publicly traded companies in the business. Two of the biggest, America's Car-Mart Inc. and Credit Acceptance Corp., have seen big gains in their share prices this year, outpacing the market.
Buy Here Pay Here is also being boosted by one of the sophisticated financial strategies that drove the nation's recent housing boom and bust: securitization.
Big business
Buy Here Pay Here compared to other non-traditional lenders.Source: FDIC.
Graphics reporting by Ken Bensinger
Lorena Elebee Los Angeles Times
Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.
That's because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.
Some analysts worry that the rush to securitization could lead to careless lending by dealers eager to sell more loans, as happened with many mortgage-backed bonds.
"We think that investing in such companies is a ticking time bomb," said Joe Keefe, chief executive of Pax World Management, which steers its investments into businesses it deems socially and environmentally responsible. "It has ethical as well as systemic risk implications."...
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