Used car dealers have faced a challenging market since the Covid-19 pandemic temporarily shut down the automobile manufacturing industry in 2020, which created a shortage of new cars and drove up prices.

The new car industry’s vehicle shortage and higher prices led car buyers, many of whom had received government stimulus payments, to instead seek pre-owned vehicles, which in turn created a shortage of used vehicles and also drove up those prices.

When consumers’ stimulus payments dried up, some of those car buyers handed the keys to their vehicles to their lenders, which contributed to severe consequences for a subsection of the auto sales industry — used auto dealers that were also subprime lenders.

This auto dealer subsection consists of about 30,000 so-called Buy Here Pay Here car dealer-lenders who sell vehicles and finance the purchase for the consumer.

Tricolor Holdings filed Chapter 7 liquidation

The troubled Buy Here Pay Here sector last month claimed used automobile dealer and subprime lender Tricolor Holdings, which filed for Chapter 7 bankruptcy liquidation on Sept. 10 in the U.S. Bankruptcy Court for the Northern District of Texas, after its own lender, Fifth Third Bank, reported alleged fraudulent activity related to a $200 million loan it provided the debtor.

The Dallas-based company operated 65 locations in Texas, Arizona, California, New Mexico, Nevada, and Florida.

An economic downturn among combination auto dealer-subprime lenders also created financial distress for subprime lenders who provide them with financing.

Subprime auto industry lender PrimaLend Capital Partners files for bankruptcy protection.

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PrimaLend Capital files bankruptcy seeking a sale

Auto industry subprime lender PrimaLend Capital Partners LP and two affiliates filed for Chapter 11 bankruptcy protection to restructure its debts and seek a sale of its assets.

The Plano, Texas-based debtor filed its petition in the U.S. Bankruptcy Court for the Northern District of Texas in Fort Worth, listing $100 million to $500 million in assets and liabilities, including $286.1 million in debt obligations.

PrimaLend owes $186.5 million in senior secured debt, $75 million in senior unsecured notes, and $24.6 million in junior subordinated debt.

PrimaLend Capital’s major debt obligations

• $186.5 million in senior secured debt
• $75 million in senior unsecured notes
• $24.6 million in junior subordinated debt

The debtor will seek approval of up to $16 million in debtor-in-possession financing to finance its bankruptcy case from CIBC Bank and 11 other banks. The DIP loan includes a $4 million revolving DIP facility and a $12 million rollup of prepetition debt.

The debtor is negotiating with two potential buyers to possibly sell the company under its Chapter 11 case.

PrimaLend specializes in Buy Here Pay Here financing

PrimaLend is a non-traditional lender that specializes in lending to Buy Here Pay Here automobile dealers who are unable to self-fund their operations and may not yet qualify for traditional bank funding.

“Over the years, the company has assisted multiple borrowers (i.e., BHPH dealers) in ‘graduating’ from the Company’s lending platform to more traditional bank financing, thus lowering the cost of capital of the dealers and increasing their profitability,” according to a declaration from the debtor’s Chief Restructuring Officer Tanya Meerovich.

The market to finance the Buy Here Pay Here lenders is large and complex, according to the declaration, with 30,000 licensed dealers and $20 billion in annual receivables originations to consumers.

More bankruptcy:

• 34-year-old casual dining chain files for Chapter 11 bankruptcy
• Major seafood company files for Chapter 11 bankruptcy
• 55-year-old women’s fashion company files Chapter 11 bankruptcy

Under the Buy Here Pay Here car dealer model, the automobile business sells vehicles to low-income or no-credit buyers and finances the purchase through a seller-financed contract or retail installment sales contract.

The seller-finance model allowed people who wouldn’t normally be able to afford a vehicle to purchase one, as increased used vehicle prices and rising interest rates following the Covid-19 pandemic had locked many consumers out of the prime auto credit market, according to the declaration.

PrimaLend’s debtor-in-possession financing lenders:

• CIBC Bank
• SouthState Bank NA
• SouthState Bank
• Hancock Whitney Bank
• Properity Bank
• Woodforest National Bank
• First Horizon Bank
• BOKF NA, dba Bank of Texas
• Sunflower Bank NA
• Cadence Bank
• The Huntington National Bank, S/B/M to Ventex Community Bank
• Georgia Banking Company

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