Santander Consumer USA Holdings Inc. is grappling with what has become a shaky relationship with the auto finance partner responsible for more than half of the lender's auto originations.
On June 1, outgoing Fiat Chrysler Automobiles NV CEO Sergio Marchionne confirmed the carmaker's intention to develop a U.S. auto financing business of its own. The venture, originally reported May 30 by Bloomberg News, would threaten a partnership that has fueled Santander Consumer for several years. The companies are partnered through a 10-year financing agreement reached in 2013.
Santander Consumer is now in exploratory discussions with Fiat Chrysler about a sale of Chrysler Capital, the auto finance business shared by the two companies. Whether those talks will lead to a complete sale remains unclear as "this process will likely take some time to complete," Santander Consumer President and CEO Scott Powell said.
"We are confident in our current capabilities and our future growth potential, with or without Chrysler Capital," Powell said on a June 1 conference call with investors and analysts. "It's too soon to tell how our conversations with Chrysler will end up."
The 2013 agreement made Santander the preferred provider for Fiat Chrysler consumer loans and leases and dealer loans. Chrysler Capital has since emerged as a significant earnings driver for Santander Consumer, bringing in $1.9 billion in loan originations and $2.1 billion in lease originations for the first quarter, together representing about 63.5% of the company's $6.3 billion in total auto originations for the period.
The earnings impact of losing that "big chunk of business" would ultimately be the largest risk to Santander Consumer, Chris Donat, an analyst with Sandler O'Neill, said in an interview.
Fiat Chrysler could eventually acquire Chrysler Capital outright, which would give Santander Consumer an infusion of capital for its stake in the business that could then be returned to shareholders, Donat said. But Fiat Chrysler may also look to build up its own financing unit, potentially leaving Santander Consumer with a sizable hole in its business profile.
Fine print
The companies' financing agreement still has five years remaining. But Fiat Chrysler could be in a position to terminate the contract early as Santander Consumer has failed to meet certain goals that the agreement outlines, according to a Santander Consumer annual filing. In the first quarter, Santander Consumer's lending penetration rate was 28%, less than half of the 65% that was targeted for the end of April, according to a quarterly filing.
Santander Consumer wrote in the filings that persistently low interest rates and the competitive landscape have prevented it from offering more attractive loans than competitors.
Ending the contract early could have a "materially adverse impact" on Santander Consumer's business, financial position and results of operations, according to the filing.
Still, despite not meeting those goals, Santander Consumer's chief executive said on the call that "there is no ability to unilaterally terminate that contract." A Santander Consumer spokesperson did not respond to a request for comment on the filing's details.
If Fiat Chrysler did agree to acquire the business, Santander Consumer would in return receive a "fair value" pricing based on a separate 2013 agreement, Powell said. Defining what constitutes fair value could be a point of contention though, said Sandler O'Neill's Donat, who noted that Santander Consumer has a different CEO and CFO than it did in 2013.
A sale of Chrysler Capital would also require Santander Consumer to build out a complete company that could then be installed into Fiat Chrysler's organization. The Chrysler Capital business does not operate separately from Santander Consumer's other operations, so the company would be tasked with allocating technical, risk and operational staff and resources to the separate division.
By separating from Chrysler Capital, Santander Consumer itself could also be bought out entirely, Compass Point Research and Trading LLC analyst Michael Tarkan wrote in a June 1 research report. If Fiat Chrysler were to buy Chrysler Capital outright, Santander Holdings USA Inc., a wholly owned subsidiary of Banco Santander SA, might look to buy the 32% of Santander Consumer that it does not currently own, he wrote.
"[Santander Consumer] would be left with a smaller, overcapitalized origination franchise that would make more sense rolled up into the larger organization," Tarkan wrote.
