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Investing in bad credit
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October 22, 1996: 8:36 p.m. ET
Consumer finance companies go public in search of needed cash cushion
From Correspondent Rhonda Schaffler
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NEW YORK (CNNfn) - Lending to consumers with bad credit can be risky business, but that hasn't deterred a parade of finance companies from going public over the past year.
With credit-card delinquencies and personal bankruptcies rising, consumer finance companies-enterprises that provide auto loans and mortgages to consumers with poor credit histories - are finding plenty of business these days. Some companies are seeing a 50 percent hike in loans.
But the companies are seeking cash to help them build a cushion against future losses.
"A lot of these companies need capital for potential losses down the road," said Tom Facciola, financial services analyst with Salomon Brothers. "They're able to exhibit good earnings now because there is a good amount of loan growth and that's often enough to cover whatever sins are being committed at present. But you need a lot of capital, rainy day capital."
Eight consumer finance companies have gone public since January, and their shares have risen an average of 40 percent. But history has shown that those gains could be temporary.
Robert Natale, new issues analyst with Standard & Poor's, points to 24 auto finance companies that went public between 1994 and 1995, and half of them are down 50 percent from their IPO price. (196K WAV) or (196K AIF)
Experts say many companies, seduced by the success of firms like the Money Store, are rushing into the public market too soon.
They also warn that finance companies are extremely sensitive to the health of the economy, and that a slowdown could cripple the profits of this year's crop of IPOs if collecting on high-risk loans becomes difficult. 
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