Onyx Acceptance Corporation Business Information, Profile, and History

Company Perspectives:

Onyx's prime and near-prime lending proficiency is the foundation for its contract purchasing, securitization and servicing operations. During its first nine years, Onyx has earned a reputation as a reliable and consistent source for dealers to effectively and competitively place their prime and near-prime auto buying customers.

History of Onyx Acceptance Corporation

Onyx Acceptance Corporation, a specialized consumer finance company, got off to a fast start in the mid-1990s but has threatened, at times, to stall. Engaged in the purchase, securitization, and servicing of motor vehicle retail installment contracts, Onyx works primarily with franchised automobile dealerships and focuses on the later model used car market. Onyx purchases the accounts receivables from the dealerships and then collects on the accounts. Unlike many competitors, Onyx has stuck with prime and near-prime consumers, not succumbing to the risky allure of the higher interest rates charged to subprime borrowers. To raise money to buy more accounts, Onyx stores up the assets it purchases and then spins them off as securities.

Start Your Engines: 1993-96

Auto finance executives eager to get in the race themselves revved up their engines and founded Onyx in 1993--most of top management had pulled away from Western Financial Savings Bank in Irvine, California. The six-person Orange County operation began the purchase, origination, and servicing of contracts in February 1994.

Running under the green flag, Onyx doubled the number of dealerships in its network during 1995. Total revenues climbed to $5.6 million, and the growth helped pare down the start-up company's losses. Plans were in the works to broaden its reach on the West Coast.

Onyx raised nearly $28.8 million in March 1996 when it sold 46 percent of the company to the public at the asking price of $11.50 per share. At least nine other auto finance companies had gone public during the past year, according to Knight Ridder.

When Brian McInnis resigned as CEO, in September 1996, John Hall succeeded him. The company the men helped found now operated in Washington, Arizona, and Nevada, as well as California. Eight regional offices served the company's customer base.

By this time, Onyx had completed its third asset-backed securitization. The automobile receivables the company bought were bundled together and then sold to raise funds. The $120 million transaction included loans originated outside California--a first in company history. "We were one of the few, if not the only company, who was able to go public with its securitization about nine months into our organization," Chief Financial Officer and Executive Vice-President Don Duffy told Asset Sales Report in 1999.

Onyx stayed the flow of red ink in 1996, recording a net profit instead of a net loss. Total revenues increased more than fourfold, to $25.2 million. An increase in the servicing portfolio helped the bottom line. Servicing income--the money earned on loans the company has securitized and sold--approximately doubled on the year. On the down side, delinquencies and loan losses jumped due to a rash of bad contracts out of its North Hollywood office. In response, Onyx began increasing its loan reserves. At the time, loan reserves were 2.17 percent of loan portfolio; the number increased to 3.68 percent by the end of 1997.

Avoiding Debris on the Track: 1997-98

The auto finance industry's image was tarnished from a string of unfavorable developments in early 1997. Jayhawk Acceptance Corp. in Dallas moved into bankruptcy protection, reeling from too many bad loans. Illinois-based Mercury Finance Corp. saw its stock plummet 86 percent in one day, following the report of accounting irregularities and a missing accountant. The chairman of Ugly Duckling in Phoenix turned out to be a convicted felon, a revelation that came to light only after the company went public. Western Financial Services lost ground in the stock market as it reported a rise in uncollectable loans, according to a Knight Ridder article by Andre Mouchard.

Publicly traded companies, including Onyx, felt the reverberations. Trouble in the real estate industry also created ripples in the environment, causing investors to be more cautious with their money around subprime players in other industries.

In addition to falling stock prices, Onyx faced a possible weakening of the market for its asset-backed securities. Institutional investors, such as pension funds, were less likely to buy securities in a besieged industry. Onyx depended on the securities to bring in more capital for the purchase of additional loans from the auto dealerships.

Economic downturns also degraded the securities market: consumers were more likely to miss payments and drive down the value of the assets backing the securities. A rise in personal bankruptcies in the state of California did not bode well for the future, foreshadowing a possible upswing in losses and downturn in new business. Those companies with questionable underwriting practices were especially at risk when the economy soured.

Aware of the industry's vulnerabilities and seeing its own stock trading below its initial public offering, Onyx took measures to guard against an unwanted takeover. A "poison pill," giving shareholders preferred stock, was scheduled to go into effect if an investor accumulated a 15 percent stake in the company.

Although the company's total revenue climbed in 1997 to $36 million, net income fell. The decrease was attributed to increases in loan losses, loss reserves, and operating expenses. On the plus side, as others in the auto finance sector were showing flat or declining growth in loan volume during 1997, Onyx's volume climbed 89 percent.

In an effort to diversify, Onyx had begun exploring avenues for direct contact with consumers. Private party sales made up a significant segment of the used car market. To facilitate entry into this area Onyx looked into partnerships with other organizations, such as C.U. Acceptance Corp., which examined the records of consumers who had been turned down for loans by credit unions. Ultimately, Onyx would stick with its core dealership market.

Getting on the Map: 1999-2002

In order to fund the purchase of additional accounts receivable, Onyx itself took on debt. Credit deals in 1999 included $150 million with Chase Manhattan Bank, $375 million with Triple-A One Funding, and $100 million with Merrill Lynch. According to Loan Market Week, "All three credits are warehouse facilities, meaning they are used to purchase assets that are stored up, or warehoused, before being spun off in an asset-backed securities deal."

The expansion drive brought Onyx recognition as one of the fastest growing companies in Orange County, California, and in the nation in 1999. Onyx had $1.5 billion of the $67 billion near-prime used car market that year.

Troubled by poor underwriting at times in the past, Onyx was now confident of the system it had in place. "Our credit people and the sales people work together as a team, and they're paid identically," said Duffy in Asset Sales Report. "And they're paid on the basis of their volume, and their yield, and the credit quality that comes from the audit processes. And we think that makes our underwriting process the best in the industry."

In 1999, net income rose by 61 percent to $9.8 million, and total revenue climbed 47 percent to $88.9 million, according to the Orange County Register. But, stock price had been sliding, hurt by rising interest rates. The Federal Reserve Board had been boosting interest rates to hold back inflation. Onyx raised its own rates to keep pace; some other lenders had not. Fears of increased loan delinquencies also had depressed stock price. In early March 2000, Onyx slid to around $5 per share, off 44 percent from its July 1999 trading price of about $9 per share.

At the beginning of May 2000, Onyx operated 17 auto finance centers: five in California and one each in Arizona, Washington, Nevada, Florida, Illinois, Georgia, Michigan, New Jersey, North Carolina, Virginia, Pennsylvania, and Texas. An 18th auto finance center opened later in the month in the metropolitan Boston area and an account servicing center, and its 19th auto finance center opened in St. Louis in June. Also in June 2000, the board authorized the company to begin a stock repurchase program. The company considered its stock to be undervalued.

Net income and earnings per diluted share slid in 2001 as compared with 2000, hurt by the national economic slowdown following the September 11 attacks on the United States. The U.S. economy and the used car market remained troubled into 2002. Onyx concentrated on maintaining credit quality and improving operating efficiencies, and proceeded to produce a seventh straight year of profitability.

Continuing the Race: 2003 and Beyond

Overall, Onyx had purchased and securitized more than $9.2 billion in auto contracts by May 2003. The company's auto dealer base numbered 11,000: 90 percent franchised and 10 percent independent. Its finance centers served most areas of the country, particularly targeting those areas with a high concentration of dealerships. Onyx worked with dealers in 36 of the 50 states.

The company's future hinged on a number of risk factors, including competition within the industry, economic conditions, and availability of capital. Among its competitors were captive finance affiliates of major auto manufacturers, banks, independent finance companies, credit unions, and leasing com-

Chronology

• Key Dates:
• 1993: The company is formed by a group of executives experienced in auto finance.
• 1994: The company begins purchasing, originating, and servicing auto contracts.
• 1996: Public trading of stock begins.
• 1997: The company survives a dramatic scale-back of the auto lender industry.
• 2000: The company is cited as one of the nation's fastest growing companies.
• 2003: The company enjoys its seventh consecutive year of profitability. panies. Some of these competitors surpassed Onyx in terms of financial resources, longevity of relationships with dealerships, and range of financing or services. Onyx, in turn, emphasized its superior level of service to dealerships and their customers.
• The economy continued to be unsettled into 2003. The deficit was on the rise due to mounting war-against-terror costs, and domestic unemployment rates remained elevated. Onyx planned to introduce a product targeting high-end prime customers and to enter the New York and Ohio markets.
• To raise additional funds, Onyx added another route: renewable, unsecured, subordinate notes offered directly to consumers. Investors in the bonds could reap high yields, but only by accepting a high level of risk. The venture was not unlike the auto finance industry, which had fallen from about 30 publicly traded companies in 1996 to five in 2003.