Banco Santander SA of Spain is squeezing some much-needed capital out of its U.S. operations with a deal to sell a minority stake in its Dallas auto lender to a private-equity consortium.

The Madrid banking giant, under pressure to bolster its balance sheet amid Europe's debt woes, will book a capital gain of $1 billion from the sale of 35% of Santander Consumer USA. Three well-known buyout shops — Warburg Pincus, Kohlberg Kravis & Roberts, and Centerbridge Partners — and the lending unit's chief executive, Thomas Dundon, agreed to acquire it.
The four parties are investing $1.15 billion, which will help the fast-growing Santander Consumer make more loans through the 13,000 auto dealers it works with around the country.

The investment creates an accounting gain for Banco Santander because the deal values Santander Consumer at around $4 billion, which is much more than the $650 million Banco Santander purchased the company for in 2006.

European leaders are weighing measures to force the region's biggest banks to raise capital. High unemployment and a dismal real estate market in Spain has weighed heavily on the domestic operations of Santander, which expanded heavily in the U.S. during the downturn through its 2008 purchase of Philadelphia's Sovereign Bank.

This deal — which does not involve the 700-branch Sovereign — is the latest indication that Santander's growth ambitions in the states have not wavered despite its troubles in Europe. It reportedly sought to merge Sovereign with Buffalo's M&T Bank Corp. last year, but the talks fizzled over control issues. Sovereign bought a $200 million credit card portfolio from FIA Card Services NA in August.

The rebound in car sales has been a boon for Santander Consumer, a profitable, high-return businesses. Santander wants to keep growing the business — which purchased $3.2 billion of auto loans from Citigroup Inc. last year. But capital is precious at the moment. It began looking for minority investors over the summer. Warburg, KKR and Centerbridge are active in financial services.

The rocky economy has been good for private equity shops interested in banking assets.
Other European banks such as Royal Bank of Scotland and BNP Paribas — two other conglomerates with large U.S. retail banks — have been exploring sales of non-core assets in areas like aircraft leasing. Like Banco Santander, they are wary of putting their core U.S. franchises up for sale because they want to stay in the states. They also do not want to book a loss selling them in a down market.

Deutsche Bank and Barclays Capital advised the investment consortium in the deal with Santander.

Effect on Securitization

Santander Consumer is the sponsor and servicer for many subprime auto loan securitizations, according to a report from Bank of America Merrill Lynch

BofA Merrill analysts think that the sale should have a minimal effect on its servicing capabilities. Because of this, they said that there should be minimal impact on the trading levels of exiting auto loan ABS serviced by the firm.

But, the sale, analysts said, can affect Santander Consumer's future origination strategy, analysts stated. "We believe the company is likely to continue to originate loans used to finance the purchase of used vehicles by subprime obligors, although the company may look to increase origination volume by targeting underserved sub-prime obligors," analysts wrote. 

They do not think that Santander Consumer will look to move its focus to higher-quality obligors, particularly if it plans to continue to use the subprime ABS market to fund originations.

BofA Merrill analysts said that subprime auto loan ABS are currently trading at a concession to prime auto loan ABS. This is why before establishing a prime platform, Santander Consumer would need time to show its capabilities as a prime lender. "We believe investors need to watch for a meaningfully changes in pool composition or static pool performance of related ABS to ensure enhancement levels reflect any changes to pool composition," they wrote.

Santander Consumer distributes loans via a network of over 13,000 auto dealers, BofA Merrill analysts reported. The firm's managed subprime auto loan portfolio was at $15.1 billion as of the end of June 2011.

In the last five years, BofA Merrill analysts said Santander Consumer has sponsored $16.2 billion of subprime auto loan ABS. The company performs the servicing functions for these deals, which have an approximately $7.6 billion remaining balance. At the time origination, the weighted average FICO scores were between 501 and 586. Most of the loans finance used vehicles usually 75%-85%.

Previously, according to analysts, the firm has bought loans from Triad Financial Corp., which Santander Consumer eventually purchased back in 2009. It has also acquired loans from HSBC Auto Finance and CitiFinancial Auto

Santander Consumer also entered into third-party servicing agreements with HSBC over the period 2009-2010 and CitiFinancial in 2010, BofA Merrill analysts reported.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.