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, the rapidly growing consumer lender, appears to be extending loans to avoid setting off credit-quality triggers that could end up depriving it of much-needed cash.

The Fort Worth, Texas-based company, which makes high-interest car loans to people with dubious credit histories, boosted the size of its loan portfolio by a stunning 51% in 2001, reaching $12.4 billion. But the economic slowdown, combined with possibly poor borrower selection, has led to a sharp rise in past-due loans at AmeriCredit. Credit fears have driven the stock 67% below its 52-week high. Tuesday afternoon it was off $1.20 cents, or 5.4%, to $20.81.

Now the deterioration in credit quality is on the verge of having a serious impact on AmeriCredit's cash flows. The rising amount of nonpaying loans could trigger actions that end up starving AmeriCredit of the cash it needs to fund more loans. If that happens, AmeriCredit would have to slam the brakes on the growth the market craves.

In that scenario, earnings would tank and bad-loan losses on AmeriCredit's portfolio would rise to intolerable levels. If that all happened, AmeriCredit's stock would trade even below current depressed levels. And the loan accounting methods AmeriCredit appears to be using to keep a lid on past-due loans could draw the scrutiny of investors who are still nervous about accounting issues.

AmeriCredit didn't immediately return a call seeking comment.


Like many other financial firms, AmeriCredit packages its loans and passes them to off balance sheet trusts that issue bonds that are backed by the loans. In this process, known as securitization, the proceeds from the bond sales go back to AmeriCredit, which uses the money to make more loans and pay debts.

However, embedded in the bonds are special triggers designed to protect owners of the bonds from a sharp worsening in credit quality. One trigger mechanism demands that if delinquent loans rise above certain levels, cash that would otherwise flow to AmeriCredit has to be retained in the trust as a protective cushion. Data on these trusts are released monthly and are followed closely by investors.

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In recent months, delinquency-related triggers on a number of AmeriCredit trusts were close to being set off. Credit trends strongly suggested that triggers in several trusts were going to be breached in January. However, delinquencies came in just shy of trigger levels in January. Why didn't they go above?

Because, it seems, AmeriCredit made many delinquent loans current again through a practice known as offering an extension. AmeriCredit allows borrowers with payment difficulties to skip loan installments and have their loans classified as current. The missed payments are added to the loan and must be paid eventually, but the deferment is designed to give borrowers a breathing space.

AmeriCredit's critics have claimed the company uses these extensions to limit delinquencies and losses, but the firm has always strenuously denied this.


However, the January numbers would appear to undermine AmeriCredit's protestations that it's not massaging its numbers with extensions. In six securitization trusts in which delinquency triggers were within a hair's breadth of being set off, extensions rose by large amounts. The table below shows the trusts and the relevant numbers.

The 2000-A trust shows that on a three-month average basis, its loans that are more than 60 days past due add up to 4.97% of the trust. That is a minuscule 0.03 of a percentage point below the trigger amount of 5%. But in January, extended loans soared from 2.72% of the trust's loans to 3.33%. Such a rise in extensions is extremely uncommon after a trust is about 10 months old.

In fact, the closeness of the delinquency numbers to the trigger gives the impression that AmeriCredit may have been deliberately granting extensions to avoid keeping cash in the trust. There are also triggers for the amount of extensions, for loans in which the car is repossessed, and for actual losses from when the loan is written off as unrecoverable (a charge-off). AmeriCredit's extension triggers are a long way from being breached.

When asked about the delinquency triggers at a January investor conference, AmeriCredit told attendees that one way it could avoid hitting them would be to repossess more cars. That takes the car loan from the delinquency bucket into the repo bucket. And in January, repossessions did go up sharply. To the skeptics, using repos is a far more legitimate way of reducing delinquencies because the company will almost certainly have to recognize a loss on the loan, possibly giving a more conservative picture of credit quality.

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In keeping with TSC's editorial policy, Peter Eavis doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.