This time last year AmeriCredit Corp. was in the middle of a liquidity crisis brought on by unanticipated economic factors and strategic bungles.

But now Clifton Morris Jr., the subprime auto lender's chairman, is looking for ways to use the excess capital it is accumulating.

It seems one of the lessons he learned over the last 16 months is that bigger is not necessarily better. "We got arrogant and contentious," Morris admitted bluntly during a recent interview at AmeriCredit's Fort Worth headquarters.

In the 11 years since its founding, its managed loans have mushroomed from $25 million to $13 billion at the end of last year, and all the while AmeriCredit has stayed in its only business line - making loans for new and used cars through dealerships for customers with less than stellar credit histories.

This unfettered growth tripped up AmeriCredit in 2002, when the collapse in used-car prices left it with undervalued collateral. Cash-strapped and with its own debt ratings in jeopardy, it was forced to put the brakes on production.

What followed was a dramatic change in philosophy, said Daniel E. Berce, AmeriCredit's president. Profitability, not growth, became the guiding factor. "We are no longer seeking to be the biggest. We honestly don't have market share targets."

But questions about AmeriCredit's future linger. Morris said investment bankers and potential buyers have approached him, but talks about selling the company have yet to evolve into serious negotiations. It could be because AmeriCredit's business plan scares off risk-averse buyers, despite the potentially attractive profit margins.

Nevertheless, Morris and Berce say there are no plans to stray far from their original plan. AmeriCredit may expand its lending base to include customers with slightly better credit, but it will not target prime borrowers.

And they have little interest in diversifying into banking, insurance or even credit cards.

The conventional wisdom is that financial firms with deeper pockets and better access to funding will absorb specialty lenders. Citigroup bought Associates First Capital Corp. in 1999. In November, HSBC bought the Prospect Heights, Ill., consumer lender Household International. Barclays PLC is rumored to have its eye on Capital One Financial Corp. of McLean, Va. (Both companies declined to comment.)

Still, AmeriCredit seems determined to stick it out. "I am absolutely certain there is a permanent place for specialty lenders, just like there is a permanent place in banking for community banks," Berce said.

No one knows whether the consumer credit cycle has run its course, but he seems determined to prove the subprime model works. The recent crisis was "the test." And AmeriCredit has passed it, however narrowly.

Morris, a 67-year-old Texas native, started AmeriCredit in 1988, after working as chief financial officer at Cash America International Inc., a Fort Worth company that provides pawn loans and check cashing services. He is a certified public accountant, as are AmeriCredit's two other top executives. His career has also included stints as the finance chief at a used-car financing firm and a company specializing in funeral and crematory services.

AmeriCredit is arguably his success story. Its share of the subprime used-car financing market grew rapidly in the late 1990s and early this decade - perhaps too much so. According to a December 2001 report by JPMorgan Securities, it had a market share of 4% and was expected to reach 10% by this year. But AmeriCredit beat that growth target. Berce said its share probably hit 10% in 2002, when its quarterly origination volume was more than $2.4 billion.

Even when the economy soured and credit quality began to erode, AmeriCredit's management was confident of its ability to maintain growth. "We had done simulation after model after study about how economic factors would impact our defaults, and those came out to be fairly accurate," said Berce, also a CPA, who was a partner at Coopers & Lybrand before joining AmeriCredit in 1991.

In the late 1990s, some on Wall Street were also optimistic. Edward Young, an analyst from Moody's Investors Service, wrote in a December 1999 report that AmeriCredit was "in a much better position to weather a downturn than its competitors."

But its managers didn't watch how the dynamics of the used-car market interacted with consumer credit quality. Prices plummeted in 2001 and 2002. Senior managers now admit they didn't recognize a fundamental shift in the business climate.

"Through 2001 and 2002, we charged ahead and continued to grow, and really did not modify the way we did business very much, assuming that whatever happened would be temporary," Berce said.

Critics have argued that AmeriCredit should have paid the same attention to prices as it said it did to consumer credit metrics, because both are equally important to its business model.

The combination of rapidly falling prices and markedly higher delinquencies proved explosive. AmeriCredit received less and less for vehicles repossessed from customers. At the same time, rising loan losses required it to put up more and more cash collateral for its loan securitizations, a critical source of funding.

And as if that were not enough, rising delinquencies choked off the payments AmeriCredit got from its securitized loans.

In September 2002, AmeriCredit scored some relief in the form of a secondary stock offering that raised $500 million. Merely pulling that off went against the speculation at the time. The proceeds helped secure the collateral needed to continue to securitize loans.

Michael Mascarenhas, of Moody's, said the offering saved the company from immediate collapse.

But according to Berce, the relief was short-lived. There were changes in November 2002: "We downsized the company. We took a swipe at" the loan book. But the changes were not enough to stabilize the rapidly evaporating liquidity. Used-car prices continued their slide, and for the quarter that ended Dec. 31 the company reported the highest delinquency ratios in its history.

"Things hit bottom at the end of 02, and then we said, Now we really have to change.' "

In February 2003, AmeriCredit slashed origination volumes by almost 70% from its peak. The company fired 20% of its workers and closed 60% of its offices. It severed unprofitable relationships with auto dealers and even gave up several floors of its headquarters in a Fort Worth skyscraper.

The board also made management changes. Michael Barrington was fired as the president and CEO in April. Morris, who had been the chief executive from 1988 to 2000, reassumed that role. Berce, then the chief financial officer, was promoted to president.

AmeriCredit's market share is back to around 2%, Berce estimated. In its second fiscal quarter, which ended Dec. 31, it originated $700 million of loans. Its main competitors are Capital One, Household, Citigroup and Wells Fargo & Co.

Morris said it was hard to watch AmeriCredit shrink. Still, the crisis made the company better, because it became stronger, he said.

Berce contends the company's current size makes it easier to adjust origination volume according to the economic environment. "We are prepared to raise our originations, raise our credit standards or change our loan-to-value ratios on a dime if we feel that that's what protects the business," Berce said.

The management also decided to change the financing side of the business. Instead of pooling securitizations for cross-collateralization, it now collateralizes each securitization separately. That funding method is more expensive, but it provides a more secure cash flow.

AmeriCredit's debt ratings have at least stabilized. Moody's, which in 1999 rated the senior debt at Baa1', now keeps it at B1', though the outlook is "negative." Standard & Poor's rates the credit B+' with "negative implications," and Fitch Inc. rates it B' with a "stable" outlook.

Recently, AmeriCredit said it would use some of its excess capital to pay down $178 million of debt. It still has $368 million of senior notes outstanding. The board will decide whether to buy back stock, and whether it will pay a dividend for the first time in the company's history, a spokesman confirmed.

But Fitch's Peter J. Shimkus said paying down debt is clearly the rating agencies' favorite use of capital.

AmeriCredit is prepared to increase quarterly lending volume to $1 billion by year-end. Mascarenhas, of Moody's, said that level would be consistent with the new strategy, observing, "Let's hope they are not going too fast."

Equity analysts were also cautious about overreacting to the changes.

After the earnings report, Michael S. Hodes and Robert G. Hottensen, two Goldman, Sachs & Co. analysts, wrote in a note that "the planned growth trajectory was reassuringly mild."

Berce said used-car prices are still at historic lows but are poised to go up. "Over the last two years, there were a lot of factors that influenced the collapse of the used-car markets," he said. "As we look forward in 2004 and 2005, those same conditions really don't exist."

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