Reuters - Novartis has assets to sell, investors wary of what it might buy - Reu

Novartis has assets to sell, investors wary of what it might buy - Reuters News
30-May-2017 09:09:54
  • Novartis mulls asset disposals of some $50 billion
  • Large transaction could fill cancer portfolio holes
  • Investors wary of big transaction after Alcon woes
By John Miller
ZURICH, May 30 (Reuters) - As Novartis NOVN.S considers asset sales that could raise $50 billion, investors are worried any cash raised may give the Swiss drugmaker firepower for another unsuccessful megadeal.
Novartis's $52 billion takeover of U.S.-based eye care giant Alcon, completed in 2011, saddled it with a business whose sales and profit have faltered two years running. (Full Story)
Now, Chief Executive Joe Jimenez is reviewing Alcon's surgical devices and contact lens businesses, suggesting they could be valued at $25-$35 billion if he unloads them. (Full Story)
The American CEO is also considering disposal of a roughly $14 billion stake in cross-town rival Roche, as well as his over-the-counter (OTC) drugs venture with GlaxoSmithKline GSK.L, worth some $10 billion. (Full Story)
Given Alcon missteps, however, investors are wary about arming Novartis with a pile of cash, for fear managers eager to refocus on cancer drugs as they address a sales hit from patent expiries might blunder into a big takeover.
"We would applaud selling those stakes, generally," said Stephen Anness of Invesco Perpetual, Novartis's 23rd largest shareholder, according to Thomson Reuters data.
"But what do you do with that money?" Anness said. "I would be very cautious about selling stakes...in things to raise a war-chest to go and do a massive deal, only for that deal to go and be another poor deal."
To be sure, Jimenez has said Novartis's M&A focus remains on smaller transactions, including lower-risk drug licensing deals, ranging up to $5 billion. (Full Story)
Still, Jimenez has not dismissed the notion of a larger transaction. He suggested last year the Roche stake - amassed during former chairman and CEO Daniel Vasella's unrequited merger aspirations two decades ago - could be sold once another, potentially more significant transaction is lined up to absorb the proceeds.
"We’re always monitoring what’s going on but have not changed our position regarding our M&A strategy or potential disposals," Novartis spokesman Michael Willi told Reuters.

PORTFOLIO HOLES
Novartis, which is holding a two-day investor event in Boston on Tuesday and Wednesday, has portfolio holes a major deal could help fill.
Where rivals including Roche ROG.S, Merck MRK.N and Bristol-Myers Squibb BMY.N have immuno-oncology drugs (I-O) on the market for a range of cancers, Novartis has only investigational molecules in this hot new therapy area.
Vas Narasimhan, Novartis's drug development chief, could be tempted to look outside the company, some analysts said, especially as competitors including AstraZeneca AZN.L near approval for their own I-O molecules.
"We believe that Novartis may be pushed to liquidate assets in order to finance acquisitions in pharma," said Michael Leuchten, a UBS analyst.
Speculation that Novartis might buy AstraZeneca sparked a brief jump in the British company's stock last year. There has also been talk of its interest in Bristol-Myers.

PUT OPTION
For its OTC joint venture with GSK that emerged out of their 2014 asset swap, Novartis faces a March 2018 deadline to exercise its put option for its 36.5 percent stake.
People familiar with GSK's thinking confirmed the British group would be a willing buyer of the stake, which added $234 million to Novartis's profit last year.
Alcon, whose eye drugs portfolio was moved into Novartis's main pharmaceuticals unit last year, has been trimmed to include surgical equipment for conditions like cataracts as well as contact lenses and solutions.
When Jimenez began his strategic review this year, he said "all options were on the table". Sales have fallen nine quarters, necessitating a costly programme to arrest the fall. (Full Story)
Even Vasella, who bought Alcon as he sought to build up a European healthcare giant akin to Johnson & Johnson JNJ.N, now acknowledges the transaction was a mistake. (Full Story)
Alcon's problems have coincided not only with the patent expiration of its blockbuster cancer drug Gleevec but also with the lacklustre launch of Novartis's new heart failure medicine Entresto, which in 2016 missed sales expectations.
Like Alcon, Entresto has forced the company to step up marketing investments.
A fund manager among Novartis's top-60 investors said the Alcon and Entresto stumbles raise red flags about managers' ability to tackle business challenges like a big takeover.
"A big deal might solve some of their issues, but personally I would prefer to see them doing smaller acquisitions," the investor said. "A cash mountain of $50 billion would definitely make me nervous."

>>> Stada bidders Advent and Permira dismiss banks advising bid - report (transl

Stada bidders Advent and Permira dismiss banks advising bid - report (translated)
30 MAY 2017
Stada bidders Advent and Permira have dismissed the banks advising them in their consortium bid for the German pharmaceutical company, Frankfurter Allgemeine reported.
The German-language daily cited unidentified sources as saying that Advent and Permira have dissolved the relationships with their advisors in the matter, making it unlikely that they will put forward a counter-bid to the wining offer from another private equity consortium consisting of Bain and Cinven.
The report said the bidding duel that happened between an Advent/Permira consortium and a Bain/Cinven consortium resulted in the latter emerging victorious, offering EUR 66 per share for a total EUR 5.3bn value.
Nonetheless, Advent and Permira had been thought to be considering coming back with a higher offer in cooperation with a company active in the pharma sector, the report said. It said the two bidders are thought to have talked with Chinese medicine producer Shanghai Pharma on a possible joint bid for Stada.
The article said the talks with Shanghai Pharma are now thought to have been called off. Advent's advisors had been Bank of America Merrill Lynch and Morgan Stanley, while Permira's had been Credit Suisse and Goetzpartners, the report said.

(JPM) Equity Strat. : Adding to the UK, reducing Japan further; Stalling

Adding to the UK, reducing Japan further; Stalling bond yields confirm one needs lower portfolio beta

* UK equities are up 9% in the past six months, lagging continental Eurozone which is up 18% over the same timeframe. We think UK is becoming interesting in the regional allocation again, and move it to N, from UW:
* 1. UK is a defensive market with high dividend yield. It should perform better in the backdrop of potential softening in activity indicators, lower inflation prints and continued range-bound bond yields. Market internals have turned defensive since early May, which is a support for the UK.
* 2. We think commodity sectors will perform better from here post Q1 weakness, helping UK – consistent with the big picture of a lower USD.
* 3. GBP might not move much higher from here, which would be a tailwind for the exporters’ part of the FTSE100. FX is also a hedge on any unexpected political outcome. Labour win would be challenging for many domestic plays – screens in the report – but exporters would benefit from the potentially weaker GBP.
* 4. UK appears underowned and it is back to being record cheap on P/B relative. This holds even ex commodities.

FT : US banks pull back from $1.2tn car loans market

US banks pull back from $1.2tn car loans market
Overstretched consumers raise fears of bubble in echo of subprime mortgage crisis

Big banks are throttling back from the $1.2tn US car loan market, fearing that consumers have taken on more debt than they can handle.

Lenders piled into the sector in the years after the financial crisis, as low defaults and an improving economy encouraged them to focus on a market that performed relatively well as mortgages soured. Total loans across the industry rose to $1.17tn at the end of the first quarter, according to the New York Federal Reserve, up almost 70 per cent from a trough in 2010.

But data released last week by the Federal Deposit Insurance Corporation showed the first sequential drop in car loans outstanding at commercial banks in at least six years. The total slipped $1.6bn to $440bn from the fourth quarter of last year to the first of this, suggesting that banks — wary of repeating the mistakes of the subprime mortgage crisis — have been spooked by rising delinquencies and the threat of litigation.

One of the banks pulling back is Citizens Financial Group, the US’s ninth largest by assets. Bruce van Saun, chief executive, told the Financial Times he would rather steer resources into areas such as student loans. “We ran up auto for a while when there was not much else going on. Now we have growth in other areas which offer better risk-adjusted returns.”

Wells Fargo and JPMorgan Chase, the two biggest banks in the sector, saw first-quarter originations drop by double digits from the same period a year earlier. Even relatively aggressive specialists such as Capital One — which added a net $2bn to its $50bn car loan book over the first quarter — are toning down their outlook.

“We’re certainly one more notch cautious,” said Richard Scott Blackley, chief financial officer, noting bigger-than-expected falls in used car prices in the first quarter. “We think that by pulling back a little bit, we’re going to . . . maximise price over volume,” he said.

Analysts expect the car loan market to keep growing, fanned by specialist non-bank lenders which focus on borrowers with lower credit scores. But the caution of the big banks — which claim more than 30 per cent of the market — shows that many are now worrying about the consequences of looser underwriting, which has seen them stretch out terms for borrowers while pushing up loan-to-value ratios and debt-to-income ratios, in an echo of the subprime crisis.

Last last year the Office of the Comptroller of the Currency warned of rising credit risk in car loan portfolios, while airing concerns over violations of fair-lending standards. Several subprime-focused lenders have disclosed in public filings that regulators and state and federal authorities are investigating them for possible abuses.

Shares in Santander Consumer USA, the subprime car loan arm of the Spanish bank, have dropped about a fifth since the beginning of March. Ally Financial, too, has fallen almost a fifth over that period, as losses on its loans bundled into securities have been higher than expected.

Analysts expect losses to keep rising if used-car prices, already down about 8 per cent this year, continue to fall. Lower prices normally mean higher gross charge-offs, as customers default on loans that exceed the value of the car, and smaller recoveries for the lender forced to sell the vehicle.

The consequences of an car sector meltdown are unlikely to be as severe as in mortgages, a market about eight times bigger, but “there will be fallout”, said Joseph Cioffi, chair of the insolvency and creditors’ rights practice at Davis & Gilbert, a law firm. “Just because something doesn’t kill you, doesn’t mean it’s good for you.”

>>> Europe Pre-Market Indications

BAML:
ARYZTA - Q3 sales 3.7% ahead, org growth better at 0% v cons -3.2% (33.9).+2%
BT - Appealing to end accruals in its defined-benefits pension scheme (316).+1%
LSE - Inline. Citi is selling them their fixed income index business (3425).+1%
INTU - Sales of 50% of Xanadu as expected. Should be reassuring today (272).+1%
H&M - Senti +ve. Chairman Persson bought 1.9m shrs for SEK227.9/shr (224).+0.5%
ASML - +ve. Samsung said to be in final talks to build no2 prodn line(120)+0.5%
MINERS - Copper -0.5%, Iron Ore fut closed and BHP OZ +1.05%, RIO OZ +1.07%.u/c
LINDE - Said to receive cEUR1b order from Russia; Sueddeutsche reports (171)u/c
INFINEON - CEO says is still seeking acquistions in the US; Faz reports (20)u/c
AKZO - Amsterdam court rejects Elliot's bid to oust Chairman Burgmans (75)..-2%
RYANAIR - Fares to decline -5-7% on weaker GBP & announce a buyback (18)..-2-3%
IAG - System issues likely to cost co cEUR100m in exceptional line (595.6)..-3%


Investec:
EU
* AKZO-Elliott fails to win court backing to oust Chairman..................-2%
* ARYZTA-Q3 revs better, margins under pressure, no o/look. 12% short base..+2%
* ELIOR-says org sales accelerated in Q2,reits FY f/casts.Appoints new CEO..+1%
* IAG-IT issues seen costing €100m. Seen lower again today (-2.7% y’day)....-2%
* LINDE-said to receive €1bn order for Russian gas facility(SDD)............+1%
* L’OREAL-Chinas Renhe said to weigh Body Shop bid(Sky).....................U/C
* NESTLE-to reduce Maggi salt content, sees sales rising 3%-5% pa.........+0.5%
* RAIFFEISEN-said to ask regulator to delay ipo of Polish unit............+0.5%
* Investor Days : AXA, NOVARTIS

UK
* AMERISUR-Successful test result at Mariposa well(Llanos Basin).........+3-4%
* ANLGOS-Competes sale of Darthbrook mine(sector +1%).......................+1%
* BABCOCK-In talks to land further European fighter pilot deals(S.Tele).....+1%
* CLS HDGS-Exchanged contract to acquire €35.6m Dortmund property..........unch
* GLENCORE-Sent letter to Aus. Authorities on copper costs(B'berg)..........+1%
* IAG-Shs (IAG SM) traded -3% yday..........................................-5%
* KAINOS-FY.5% u/l miss due to increased inv. in Health care.+ve o/look.....-2%
* KCOM-Investec appointed joint broker & Financial advisor.................unch
* LEG&GEN-Said to eye Br.Steel £15b pension liabilities(S.Times)...........unch
* LSE-Acquires F.I Analytic and Index business from Citi for $685m..........+1%
* RBS-Investors accepted £200m settlement over misled rights issue.(B'berg)unch
* RYANAIR-FY.#'s a small beat. Travel & Arrive(+6 1/2% laast 5 day)...........-2%
* SPORTECH-All conditions in relation the sale of the Pools now satisfied..unch


Macquarie:
* Anglo American AAL- Completes sales its 83.33% Interest in Dartbrook mine Australia. Unch
* IAG- Computer Failure over the weekend could cost Company up to £150m. -3%
* INTU- Forms JV with TH Real Estate for Madrid Xanadu Shopping Centre. Unch
* Legal & General LGEN- Spec to buy out £15bn ex Corus pension scheme (S. Times). -1%
* McCarthy & Stone MCS- Appoints John Tonkiss COO, previously was National Operations Director. Unch
* Ryanair RYA- FY17 Results inline with expectations, €600m share buyback. Unch


Mainfirst:
*CS-Singapore penalizes CS over 1MDB probe, fine S$0.7mln............U/C
*AKZO-Elliot fails to get court backing to oust Akzo Chairman........-1%
*LINDE-Said to receive €1bln order from Russia,signed Friday.........+1%
*ELIOR-H1 Sales 3.21b,Net 58m,Confirms FY targets,S/Int 2.8%.........+2%
*RYANAIR-NI 1.32b(1.32),2018 NI 1.4-1.45b(1.48),€600m b/b,Gd run.....-3%
*ARYZTA-Q3 Rev 975.2m(939.5),Still no guidance,NA m/pressure,SI 18%..+2.4%
*DUFRY-Hudson Grp wins contract at Raleigh-Durham airport............+0.5%
*IAG-Impact from the IT failure over the w/e est €100m-IAG -2.5%.....-2.5%
*NESTLE-To reduce salt in Maggi prods by 10%,sales +3-5% a year......U/C
*IFX-CEO still seeing aquistions in US - FAZ........................U/C
*BANCO POPULAR-Shared businesses hinder its sale says Expansion......-0.5%


CS:
Aryzta +2% Q3 Sales 4% ahead, ongoing margin pressure
Akzo -2-3% Wins court challenge From Elliott in takeover battle
Elior +2-3% Organic growth of 2.6%, CSe 1.4%, EBITDA 7% ahead
IAG -3% Weekend flight cancellations
LSE +1-2% To acquire The Yield Book and Citi Fixed Income Indices
Ryanair UNCH Net income ahead, 600m buyback announced
X-Fab -2% CFO Chris Förster to leave


Citi:
UK
* IAG - delays caused by computer sysyem failure at co's BA unit -3%

EU
* Arytza - Q3 revs beat,hired HSBC to advise on Picard stake options +1%
* Ryanair - fy revs/net in line,sees 8% rise in 2017/18 net,had run -1%
* Elior - H2 net rises 44%,confirms fy targets unch


Numis:
* LSE mkt LSEG has announced plans to acquire The Yield Book and Citi Fixed income Indices from Citi, including the World Government Bond Index (WGBI), for a total cash consideration for $685m (£535m)
* RENOLD MKT FY results in line with expectations; no change to FY18 forecasts


N+1 Singer:
UK 100
ANGLO AMERICAN (AAL) Unch * Completes sale of Dartbrook mine
INTU PROPERTIES (INTU) +0.5% * Forms new JV with TH Real Estate to own and manage Madrid shopping centre

UK 250
ALLIED MINDS (ALM) +0.5% * Jill Smith appointed as CEO
BREWIN DOLPHIN (BRW) +0.25% * Raised to Buy at Peel Hunt
CLS HOLDINGS (CLI) +0.5% * Exchanged contracts to buy German office for EU35.6m
MCCARTHY & STONE (MCS) +0.25% * Appoints John Tonkiss as COO
MEGGITT (MGGT) +0.25% * Raised to Buy at Alphavalue

SMALL CAP
KAINOS (KNOS) +1% *In line prelims, Rev. +9%, adj. PTP £14.3m +1%, cash £23.7m +58%. Positive outlook.
LONMIN (LMI) -1% *Cut to Sell at Peel Hunt
PURETECH HEALTH (PRTC) Unch *PureTech's Vedanta granted new US Patent
RENOLD (RNO) FINALS/Unch *In line finals, Rev. £183.4m, Fy profit £4.8m, cash flow from ops. £7.4m. Says markets still uncertain.

BEST OF AIM
BLANCCO TECH (BLTG) UNCH * Rob Woodward steps down as Chairman.
HORIZON DISC (HZD) UNCH * Broadly in line prelims see revenue +19% to £24.1m & ebitda loss down to £3.8m from £4.6m. £6.1m cash.
INDIGOVISION (IND) UNCH * Appointment of George Elliott as Chairman.
RHYTHMONE (RTHM) UNCH *N+1 Singer reiterate Buy recommendation and raise TP to 70p
SIGMA CAP (SGM) UNCH *Successful raise of £250m equity for PRS REIT enhances visibility.
SILENCE THERAP (SLN) UNCH * Continued expansion of IP with additional US patent application allowed for grant.
SURGICAL INN. (SUN) UNCH *Initiation note with a Buy recommendation and TP 4.8p.

FT : Debt pile up in US car market sparks subprime fear

Debt pile up in US car market sparks subprime fear
In an echo of the subprime housing crash, delinquencies of US car loans are rising amid allegations of mis-selling

Kathy Boluch was in a bit of a state when she visited her local used-car dealership in Quincy, Massachusetts. The rear of her Volvo had been hit by a drunk driver and her insurer was badgering her to buy another vehicle so she could return the rental car it had given her. But her low credit score and irregular income disqualified her from every loan available — until the guys out the back called Santander.

Within a couple of hours she was driving off in an $18,000 Chevrolet sport utility vehicle, financed with a $16,000 loan from Santander Consumer USA, the auto-loans division of Spain’s biggest bank. To clinch the deal, the salesman suggested that Ms Boluch, a freelance copywriter, help out the dealership with promotions. He even listed her as an employee on the loan application.

But the work never came. Five years on, Ms Boluch, 60, is still paying $350 a month to bring down an outstanding balance of about $10,000. Meantime, she has spent another $7,000 on repairs to a “terrible” car that would now fetch about $750 in a sale.

“I was basically putty in their hands, totally swept off my rational sensible self, drawn into this vortex,” she says.

Ms Boluch’s story — which helped trigger an investigation by the state attorney-general and a $22m fine in March for Santander Consumer — is just one of many from a seven-year boom in car loans that has strong echoes of the pre-crisis mortgage frenzy.

In both cases, big banks and finance companies relaxed underwriting standards to keep up with rampant competition. Investors snapped up whatever high-yielding products investment banks could come up with. And consumers signed up to big loans on the assumption that if they had trouble paying them off, they could always just sell the asset.

Just as with mortgages, the car loan business has grown rapidly. Total auto loans outstanding came to $1.17tn at the end of the first quarter of this year, according to the New York Federal Reserve, up almost 70 per cent since a post-crisis trough in 2010. That has helped push total household debt to $12.7tn, surpassing the 2008 peak.

But now there are signs that consumers have had about as much as they can take after eight years of weak economic expansion.

Strains have been evident for at least a year at the bottom end of the auto-loan market, in the world of subprime. But in prime debt, too, delinquencies are beginning to pick up, forcing big banks such as Wells Fargo and JPMorgan Chase to pull back.


Carmakers are now boosting discounts and cutting production to address rising inventories on dealer lots. Falling used car values, in turn, are pushing up defaults, as people find themselves stuck in loans they cannot afford but can’t trade out of because they still owe more than the vehicle is worth.

“Here we are again,” says Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago-based consulting firm. Car loans are a smaller market than mortgages, she notes, which total about $9tn. But they could still do a lot of damage if consumers keep missing payments.

The share of auto debt more than 90 days overdue rose to 2.3 per cent in the first quarter, the highest in six years, according to the New York Federal Reserve. “It’s a new mini-Big Short,” she says, alluding to traders who made billions by betting on a housing collapse a decade ago.

Rise of the subprime specialists

If the architects of the Dodd-Frank Wall Street Reform and Consumer Protection Act had their way, auto dealers across the US might have been on a tighter leash. In early drafts of the 2010 law, dealers were to be put under the supervision of the new Consumer Financial Protection Bureau.


But then a Republican congressman from Orange County, California — himself a former auto dealer — pushed for a carve-out and won. The result: the CFPB regulates auto lenders, but car dealers continue to answer to the Federal Trade Commission, which has historically had more of an eye on deceptive advertising than shakedowns at the point of sale.

It is an unsatisfactory situation, says Chris Kukla, an executive vice-president at the Center for Responsible Lending in Durham, North Carolina. He notes that Dodd-Frank required mortgage lenders to take specific steps to determine that home buyers can actually handle their payments. If they do not take those steps, homeowners can sue and potentially win big damages.

No such protections apply to car loans. As a result, he says, dealers have stretched out terms, moving from the standard 60-month contract to 72 or even 84, meaning that borrowers are likely to stay “underwater” on their loans for longer.

At the same time, dealers have cranked up loan-to-value ratios and debt-to-income ratios, putting borrowers under greater strain.



“We’re setting people up to be in very expensive loans where they owe more than the car is worth for the duration,” says Mr Kukla. “So there’s a higher chance of having some kind of life event — such as a big medical bill — where they are forced to sell their car and end up in lots of trouble.”

The loss of a car could mean the loss of a job, and other loan defaults, he adds. “What we should have learnt from the last crisis was that we can prevent needless repossessions. But we didn’t.”

Echoes of the mortgage crisis

Some of the most rapid growth has occurred at specialist subprime lenders such as Exeter Finance of Irving, Texas, owned by Blackstone, and Skopos Financial, also of Irving, which is owned by Lee Equity Partners, a New York private equity firm. Lenders like these have pumped out billions of dollars of loans, which have been bundled together, then sliced into securities by the likes of Wells Fargo and JPMorgan Chase.

According to Morgan Stanley, the share of auto securities tied to “deep subprime” loans — those given to borrowers with scores below 550 on the commonly-used FICO creditworthiness scale — rose from 5.1 per cent of total subprime deals in 2010 to 32.5 per cent last year.

Santander Consumer, America’s biggest issuer of subprime auto securities, says it has smartened up its act since the 2009-2014 period covered by the $22m settlement with Massachusetts. Delaware separately fined the company $3m for allegedly harming consumers by funding loans without having a reasonable basis to believe that the borrowers could afford them. In agreeing to the settlements, Santander Consumer neither admitted nor denied the attorney-general’s allegations.

The Spanish bank became a dominant player in the US auto market in 2006, when it bought Drive Financial Services of Dallas. Since then it has bought other auto lenders and built relationships with more than 15,000 dealerships across the country.

According to the Delaware consent order, essentially a voluntary agreement, some of those dealers were engaging in practices reminiscent of the mortgage crisis, when terms like “ninja” loans — short for ”no income, no job, no assets” — became part of the lexicon.

The consent order talks of “power booking”, for example, or stating — falsely — that a vehicle has additional features that increase its value, thereby supporting a higher loan amount. Then there was “packing”, or adding extra products such as warranties to a loan, without breaching maximum loan-to-value ratios.

Santander Consumer had suspected for a while that salesmen at one outlet were inflating customers’ incomes as they applied for loans. Those suspicions were right. Of the 11 loans Santander Consumer examined in 2013, just one stated income was accurate and another three could not be verified. Of the seven that were inflated, the smallest overstatement was $45,324 a year.


“Outrageous,” said Maura Healey, attorney-general of Massachusetts, as she handed out the fine. The company had continued to buy loans from the unnamed dealer even after the fraud was detected.

Ms Healey drew parallels to earlier home-loan cases featuring Goldman Sachs, Royal Bank of Scotland and Countrywide, among others. “After years of combating abuses from subprime mortgage lenders, these practices are unfortunately familiar,” she said.

Used car glut

The big banks have been throttling back and assuring investors that the problems can be contained. Wells Fargo’s $5.5bn of auto-loan originations during the first quarter were down 29 per cent from a year earlier.

Last month, Franklin Codel, head of consumer lending, said Wells had been taking “prudent” steps to manage “industry stresses” within its $61.5bn portfolio.

JPMorgan Chase has slammed on the brakes too, adding $8bn of loans and leases during the quarter, down 17 per cent. According to Gordon Smith, head of the bank’s consumer banking division, the share of subprime loans within that mix has fallen “dramatically”.

But losses look set to rise because when lenders repossess cars from defaulted borrowers and then sell them, they are getting less and less money back.

A flood of used cars has hit the market, depressing prices, and many more are on the way. Another 7m or 8m cars will come off-lease by the end of next year, according to Morgan Stanley estimates, which is about twice the long-term average.

The combination of higher defaults on the loans and lower recoveries on the cars could be “painful” for the banks, says Brian Foran, analyst at Autonomous Research in New York. He notes that Wells or JPMorgan probably “won’t be blown up” by their exposures. JPMorgan, which often boasts of its “fortress” balance sheet, has $79bn of auto loans and leases among total assets of $2.5tn.

But for specialists with higher car-loan concentrations such as Capital One, Huntington Bancshares, Ally Financial or Santander Consumer USA, he says, the outlook is gloomier.

Data from Ally’s securitisation programme show that the Detroit-based lender, spun out of General Motors a decade ago, got back about 60 cents in every dollar owed in April, from 72 cents a year ago. The recovery rate at Santander Consumer was even worse, dropping to 46 cents from 53 a year ago. Recoveries “drove off a cliff”, says Betsy Graseck, an analyst at Morgan Stanley.

Meanwhile, the legal troubles are not over for the subprime lenders. Ally, Santander Consumer and others have been subpoenaed by federal prosecutors as part of an investigation into subprime auto practices and related securitisation activities, according to public filings. New York’s Department of Financial Services is also probing several car finance companies, according to a person familiar with its supervisory programme.

As for Ms Boluch, she is expecting a cheque for $8,000 from Santander as compensation for the way she was treated. To this day, she kicks herself for allowing herself to be “manipulated”.

“They do seek out people at their lowest ebb, people in a bad frame of mind,” she says. “I should have walked away.”



History repeating: ‘Big Short’ fund manager targets auto sector
Steve Eisman knows sloppy underwriting when he sees it. The fund manager’s attempts to profit from lax lending in the run-up to the 2008 financial crisis were one of the main narrative arcs of The Big Short, Michael Lewis’s book about the subprime mortgage meltdown.
That same eye for a badly crafted loan has now drawn him to autos, where he is shorting “some” of the subprime lenders and “one or two” used-car sellers.
During the recession, Mr Eisman notes, car loans held up pretty well. Consumers tended to default on their house first, credit card second and car third.
But the deterioration of underwriting standards has been so dramatic that losses are bound to rise, he predicts.
Meanwhile, falling used car values caused by a glut of vehicles coming off lease contracts will probably push up defaults too.
“It’s starting to get a little dicey in terms of credit quality,” says Mr Eisman, a former lawyer who put on his big bets against subprime mortgages at Greenwich, Connecticut-based FrontPoint Partners, then a unit of Morgan Stanley. He is now a senior portfolio manager at Neuberger Berman in New York.
Will it be as bad as the home loan crisis? Probably not. Lending standards have dropped, but it is not quite the free-for-all of a decade ago.
“At the height of subprime mortgages, the standard was, ‘can you breathe?’ It never got that bad in subprime auto. They definitely checked your pulse.”