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Strategies & Market Trends : Dave Gore's Trades That Make Sense -- Ignore unavailable to you. Want to Upgrade?

To: hotlinktuna who wrote (12324)	9/17/2002 10:15:19 AM
From: fastcats	Read Replies (1) \| Respond to of 16631

(ACF:NYSE - news - commentary - research - analysis), the auto loanmaker that has been growing at breakneck speed, veered off the road Monday in the sort of wreck that gives investors nightmares. The Fort Worth, Texas, lender to people with poor credit histories has been grappling with rising loan defaults over the past year. But credit problems appear to have gotten so bad that the company has decided to take drastic measures to shore up its liquidity. After the close Monday, the company announced plans to issue as much as $575 million of stock, which is equivalent to half of its market worth at the shares' Monday closing price of $13.62. The bad news will almost certainly lead to a sharp selloff in the company's stock Tuesday. Detox first examined AmeriCredit's woes in a piece last year. "This looks like an admission that the company's business model wasn't able to sustain itself over a full business cycle," says Bill Ryan, consumer finance analyst at Portales Partners, a New York-based brokerage. "Lending money to people who have little intention of paying you back, regardless of what interest you charge, has never been a good long-term business plan," adds an unnamed hedge fund manager who is short the stock. Mother of Invention? AmeriCredit took drastic action on numerous other fronts as well. In a bid to avoid making onerous cash deposits with the trusts it sells it loans to, AmeriCredit has agreed to issue warrants -- covering the purchase of 1.3 million shares -- to Financial Security Assurance, the insurance company that provides guarantees on its bonds. AmeriCredit also said it was going to change the way it reports earnings from an aggressive method called "gain on sale" to a more conservative one, a move that will lead to much lower reported earnings and which, absent adequate disclosure, make meaningful comparisons with past periods almost impossible. Earnings guidance for its fiscal first quarter ending Sept. 30, still expressed using the gain-on-sale format, suggests profits will come in well below analysts' expectations. "I wouldn't characterize this as an emergency at all," says AmeriCredit spokesman John Hoffmann. "I'd characterize it as a new strategy." When asked whether cash flows were at dangerously low levels and if the accounting change was being to done to mask poor results, Hoffmann advised that interested parties listen to a conference call scheduled for tomorrow morning. FSA didn't return a call seeking comment Monday night. Big Sale News of the issue of new stock will almost certainly weigh heavily on the stock Tuesday, considering how big the sale will be relative to the company's current market capitalization. AmeriCredit said money raised from the planned offering may be used for building up the cash cushion it put in the trusts that it sells it loans to. Bond investors buy notes issued by these trusts. The proceeds from those purchases flow back to AmeriCredit. It makes money if interest paid on the trusts' notes is below the yield on the loans in the trust after expenses like credit losses. However, these trusts have triggers in them that require AmeriCredit to set aside large amounts of cash in restricted pools if past-due loans go above certain levels. Faced with that prospect, AmeriCredit has gotten FSA to agree to amend these triggers so that they are now set at a level in excess of the company's current forecast for delinquencies from September 2002 through February 2003, AmeriCredit said. FSA's motive appears to be to keep AmeriCredit alive. If the company collapsed, FSA could be on the hook for payments from AmeriCredit bonds. However, it is not clear at this point how much its warrants will be worth. FSA also gets a 2.5 percentage-point increase in insurance fees. AmeriCredit said it expects to report net income of $55 million to $60 million in its fiscal first quarter. That compares with analyst expectations of around $90 million, implying a large credit charge will be levied. Finally, AmeriCredit announced that it's appointing three "independent" directors to its board. AmeriCredit's top executives have become very rich from selling stock in recent years. Job No. 1 for the three new guys: Don't let anyone reprice their options after this mess. They've just committed the stock market equivalent of driving at 120 mph while under the influence.