New public auto-loan firm in works: White River to buy failed Union Acceptance

A new public company is rising from the ashes of Union Acceptance Corp., the failed east-side car-financing company, and is preparing to raise $35 million through a stock offering.

White River Capital Inc., which will operate from UAC’s former headquarters on North Shadeland Avenue, has agreed to buy out UAC’s shareholders for $3.1 million in stock and to buy Virginiabased auto lender Coastal Credit LLC for $50 million in cash.

“It’s a tough industry, a hypercompetitive industry,” White River President Mark Ruh said of auto lending. “But if you are smart and nimble, it’s a good industry.”

Ruh knows the tribulations of the field first hand. He is a principal in Castle Creek Capital, an Indianapolis private equity firm specializing in financial services companies, which had a 14-percent stake in Union Acceptance when it drove into bankruptcy court in October 2002.

UAC, formed as an arm of Union Federal Bank of Indianapolis in 1986 and spun out in a 1995 initial public offering, employed more than 600 people before waves of loan losses sent it into a tailspin four years ago.

Today, only six employees remain, led by Ruh, who became UAC president when the company emerged from bankruptcy court in August 2003. Because UAC stopped making loans in late 2002 and sold servicing rights and other assets during bankruptcy, all the firm manages now is about $315 million in old loans.

But Castle Creek, the driving force behind the formation of White River Capital, sees something else enticing in Union Acceptance: loads of losses. Under tax laws, White River can carry those forward and use them to reduce the tax bill for Coastal Credit, which earned $6.7 million on $23.8 million in revenue last year.

“Union Acceptance has an operating loss in the $100 million range. We want to utilize that operating loss,” Ruh said. “We will be able to offset the profit at Coastal Credit with the extensive loss at Union Acceptance Corp.”

Risky business

Analysts say White River is plowing into a field with plenty of risks. Coastal Credit specializes in loans to high-risk car buyers, the riskiest end of auto lending and one beset by carnage in the late 1990s.

While Coastal Credit’s average interest rate is a lofty 19 percent, that’s meaningless if borrowers default. For such firms, “credit quality is all important. There is little margin for error,” said William Lyons, an analyst with Westminster Securities Corp. in Atlanta.

Despite the risks, he said, “there is always room for a well-managed player whose appetite for growth does not outweigh its emphasis on credit quality.”

A textbook example is Florida-based Nicholas Financial Corp., whose shares are up more than 300 percent since the start of 2003. Lyons said the firm has prospered by sizing up potential borrowers through interviews, rather than relying on statistical analysis of credit scores. The firm also keeps close tabs on borrowers by operating branch offices, including one it opened this summer in Indianapolis.

Ruh said Coastal Credit uses a similar strategy in the 16 states where it operates. He noted that Coastal has operated successfully since 1987 and that it specializes in military borrowers, who often fall in the high-risk category because they’re just out of high school and lack a credit history, not because they haven’t paid their bills.

UAC had never claimed to be a player in the high-risk end of the market, but starting in 1999, the quality of its loans eroded, and the company’s centralized structure left it ill-equipped to respond, Ruh said.

While many lenders got in trouble by relaxing credit standards to fuel growth, “we thought UAC was different. They seemed to be pretty conservative in underwriting. We later found out they weren’t.”

Obstacles remain

The Castle Creek private equity firm still has a series of hoops to jump through to pull off the proposed restructuring, though it’s already completed one key step-winning unanimous approval for the plan from UAC’s board of directors.

White River now is in the process of buying out UAC’s creditors, shifting to the new company cash flows from remaining loans. The payments provide full repayment for the insurance companies that were first in line to collect; other creditors are receiving a partial recovery on their claims.

For UAC’s shareholders, the plan offers the potential to salvage some of their investment, which otherwise would have been wiped out, according to a filing with the Securities and Exchange Commission.

White River is valuing its shares at $10 each. It plans to exchange one White River share for every 100 UAC shares. That means UAC stock is being valued at 10 cents apiece, though the company’s shareholders could fare far better if White River stock performs well over time.

In addition, White River plans to sell 3.5 million new shares for $10 apiece, giving UAC shareholders first dibs. In case of insufficient demand from UAC shareholders, it says it’s lined up backup commitments to buy shares from institutional investors and wealthy individuals.

Even if all goes as planned, White River initially will have a low profile here. While White River will have its headquarters on Shadeland and retain the six UAC employees, Coastal Credit’s management will continue to run that company from its Virginia Beach, Va., headquarters.

In addition, White River expects its shares initially will trade only on an over-thecounter bulletin board, though in an SEC filing the company says it wants to make the jump to the Nasdaq SmallCap Market.

Ruh wouldn’t talk about the company’s growth plan, citing SEC restrictions on what company executives can say before a stock offering, and the SEC filing includes only general statements about Coastal’s intentions to expand into new markets.

But public companies need to grow to prosper, and analysts believe Coastal’s high-risk focus will provide it ample opportunities to expand.

In part, they say, that’s because so many lower-income Americans are caught in a Catch-22 that make them eager for car loans, even at high interest rates. The quandary: They need a car to get a good job, but they can’t afford a car without a good job.

Oregon-based CNW Market Research estimates that the size of the U.S. highrisk auto loan market is $239 billion a year-$86 billion for used cars and $153 billion for new vehicles.