Last updated: November 12, 2013 7:57 pm

Springleaf: season in the sun

Consumer lender’s business model fits the current environment perfectly

Imagine borrowing at 5 per cent and lending at 26 per cent. Springleaf Holdings, the just-listed consumer finance company, has a business model that fits the current environment perfectly.

Once part of AIG, Springleaf, in distress after the crisis, was snapped up by private equity firm Fortress Investment Group, which still owns most of it. Its core business is personal loans – it has $3bn worth, many secured by cars and household goods – made to borrowers the banks do not want. Hence the lofty lending rates. Springleaf stopped making real estate loans last year; it still has a loss-producing legacy portfolio in run-off. It also bought a consumer portfolio from HSBC, which it services.

The spread is not quite so good as the headline figures suggest. Blended into its funding costs are very cheap asset-backed borrowings to fund the real estate portfolio. Even so, conditions are good. Many banks are being picky about lending. Springleaf’s 830 branch offices averaged 3,386 loan applications apiece in the first nine months of 2013; they averaged 2,882 for all of 2012. And the delinquency rate is only 2 per cent in the consumer business. Springleaf is also keen to buy more loan portfolios.

Shares, though down on Tuesday’s third-quarter results announcement, are up about 20 per cent since the initial public offering in October. That reflects, in part, Springleaf’s ability to access cheap funding (remember, it is not a bank and it has no deposits). Debt investors, starved for yield by the Federal Reserve, have enabled it to obtain long-term financing. Its biggest forthcoming maturity ($2.4bn) is due in 2017. One might assume that if rates are higher when the time comes to roll that over, that will be because of a better economy and so Springleaf’s default rates will still be low. But if the credit crisis taught us anything, it is to question the easy assumption.

Email the Lex team in confidence at lex@ft.com

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