Navigation Capital Partners today announced that it has acquired a majority stake in Exeter Finance Corp., a Dallas-based company that buys and services nonprime auto installment sales contracts. So we’ve got 5 Questions for David Panton, a partner with Navigation:
1. Exeter describes itself as a “nonprime” auto finance company. Is there any difference between that and being a “subprime” auto finance company?
Panton: Nonprime is a broader category, but subprime is certainly most of what the company is doing.
2. Ok, most of the subprime mess has revolved around home mortgage loans. What is the difference between that market and the subprime auto finance market?
Panton: There are three main differences. First, there are no adjustable rate equivalents in the subprime auto industry, for the most part, which means we don’t have the problem of rates resetting. Second, there are very few speculators in the subprime auto business. Very few people buy cars expecting the value to go up. Finally, all people who buy cars actually use them. They are a productive asset. That’s not necessarily the case for a lot of people who buy homes.
3. The press release claims that Exeter has “thrived.” Does that really mean its 2007 numbers were up over 2006?
Panton: Yes. Exeter has a proprietary system that has been tested and demonstrated loss results that are well within manageable levels. When compared to past years, the actual Exeter default rates were actually lower.
It’s important to also remember that the rate cuts have increased our spreads, so it’s actually a great time to be doing this – because we’re paying less for money. And when we model subprime auto loans in a recession, it’s much less cyclical than one might think.
4. Do you expect other private equity firms to enter this space, and do you see Exeter itself as a growth play?
Panton: I don’t know about others, but we are very comfortable with the specialty finance space. At our previous life with Mellon, we did First Equity, which was specialty finance in the [credit] card space… The goal is to find scalable ones, and we think Exeter definately is. We’ve committed $20 million, but that can go up to $60 million [combined with co-investor Goldman Sachs].
5. You got leveraged financing for this deal from ReMark. What was the initial reaction when you went to lenders and had to say “subprime?”
Panton: There’s no question that once you mention subprime, eyebrows are raised. But once they looked at the management team and model, people became very comfortable.