PrimaLend’s Bankruptcy Renews Focus on Subprime Consumer Strain

(Bloomberg) -- PrimaLend Capital Partners filed for bankruptcy after months of negotiations with creditors following missed interest payments on its debt, the latest sign of stress in a pocket of the US economy catering to low-income consumers. 

The Plano, Texas-based provider of financing to auto dealerships focused on subprime borrowers said it was pursuing a sale of the business in bankruptcy court and would continue to fund and service loans to its own borrowers. It also said it has received commitments for bankruptcy financing from existing lenders.

PrimaLend’s filing comes weeks after the bankruptcy of one such “buy here, pay here” dealership, Tricolor Holdings, and as lower-income Americans are falling behind on car loans at the highest rate in decades. The consumer pain means lenders to businesses that finance subprime loans must exercise extra caution, said Donald Clarke, president of Asset Based Lending Consultants. 

“Pay attention. Don’t fall asleep,” said Clarke. “You need financial statements from your borrowers now, tomorrow, every month. Not in a few months when a whole new slew of defaults could have already hit.” 

Tricolor shocked investors with a sudden collapse into liquidation. While it is now subject to an in-court investigation into potential fraud and misconduct, the high-profile bankrupcty — along with the implosion of auto-parts supplier First Brands Group and fraud-linked charge-offs by regional lenders Zions Bancorp and Western Alliance — sparked worries that other troubles may be lurking after years of easy credit. Some investors are now hunting for other risks in their portfolios. 

‘We Are Vulnerable’

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon last week warned of the potential for more pain points in credit, saying “when you see one cockroach, there are probably more.”

ABLC’s Clarke said lenders have become too complacent about who and what they are financing, as their need to put money to work eclipsed concerns about risk. He advised a lender client against investing in First Brands back in 2022, he said, based on some of the same red flags investors have described since that company’s bankruptcy, including a lack of detailed disclosure.

“You’re going to lend hundreds of millions of dollars to a company and not open the hood to see how it looks inside? Is money that free?” Clarke asked. “Until we get intellectually honest about the risks that we face and the need for more robust due diligence, we are vulnerable.”  

PrimaLend listed estimated assets and liabilities both below $500 million, according to court documents it filed in the Northern District of Texas. Lenders to the bankrupt business and its affiliates include Canadian Imperial Bank of Commerce and Amarillo National Bank, according to people with knowledge of their roles, who asked not to be named discussing private agreements. CIBC and Amarillo declined to comment. 

“No debt is being called due or accelerated as a result of this process,” PrimaLend’s chief executive officer, Mark Jensen, said in a press release. “We deeply value our dealer-borrower relationships and look forward to continuing to serve the buy-here-pay-here industry as we move forward.”

PrimaLend has been in business since 2007, according to its website, on which the firm advertises itself as the lender that says “YES” when others say “NO” to borrowers seeking credit. 

Jensen previously held management roles at PwC and Microsoft Corp., according to his LinkedIn profile, and was educated at MIT and Harvard Business School, according to a post by Brigham Young’s law school describing Jensen’s support for the Mormon church’s educational institutions.

--With assistance from Libby Cherry.

(Updates with names of lenders and commentary.)

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