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Table of Contents

As filed with the Securities Exchange Commission on January 8, 2019

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

EXETER FINANCE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   6141   83-1335573

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

Exeter Finance Corporation

222 W. Las Colinas Blvd., Suite 1800

Irving, Texas 75039

(214) 572-8278

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Jason Grubb

Chief Executive Officer

Exeter Finance Corporation

222 W. Las Colinas Blvd., Suite 1800

Irving, Texas 75039

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

 

Copies to:

 

Laura Kaufmann Belkhayat, Esq.

David C. Ingles, Esq.

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

Telephone: (212) 735-3000

Facsimile: (212) 735-2000

 

Joshua Ford Bonnie, Esq.

William R. Golden III, Esq.

Simpson Thacher & Bartlett LLP

900 G Street, N.W.

Washington, D.C. 20001

Telephone: (202) 636-5500

Facsimile: (202) 636-5502

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting  
Emerging growth company       

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class
of Securities to be Registered
 

Proposed

Maximum
Aggregate

Offering Price (1)(2)

 

Amount of

Registration Fee (3)

Class A Common Stock, $ 0.0001 par value per share

  $100,000,000   $12,120

 

 

(1)

Includes shares which may be sold pursuant to the underwriters’ option to purchase additional shares, solely to cover over-allotments, if any.

(2)

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933.

(3)

To be paid in connection with the initial filing of the registration statement.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS, DATED                 , 2019

 

 

LOGO

                 Shares

Exeter Finance Corporation

Class A Common Stock

$        per share

 

 

This is an initial public offering of shares of Class A common stock of Exeter Finance Corporation. We are offering                  shares of our Class A common stock. The selling stockholders identified in this prospectus are offering                  shares of our Class A common stock. We intend to contribute all of the proceeds to us from this offering to purchase newly-issued limited liability company units from Exeter Finance LLC, our subsidiary. Exeter Finance LLC intends to use the net proceeds from our issuance and sale of                  shares of our Class A common stock (or     % of the net proceeds from this offering), or                  shares of our Class A common stock (or     % of the net proceeds from this offering) if the underwriters exercise in full their option to purchase additional shares of Class A common stock to cover over-allotments, to purchase an equivalent number of limited liability company units of Exeter Finance LLC from holders thereof. In addition, Exeter Finance LLC will use     % of the net proceeds from this offering to pay the expenses of this offering and     % of the net proceeds from this offering for general corporate purposes. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders.

Prior to this offering, there has been no public market for our Class A common stock. We anticipate that the initial public offering price will be between $        and $        per share. Upon the completion of this offering, we will have two classes of authorized common stock: the Class A common stock offered hereby and Class B common stock, each of which has one vote per share.

Our charter contains certain restrictions pursuant to which no stockholder or group (other than The Blackstone Group L.P. and its affiliates) shall be permitted to vote more than 9.99% of the total voting power of our capital stock without certain required regulatory approvals. See “Description of Capital Stock—Common Stock.”

After the completion of this offering, affiliates of The Blackstone Group L.P. will continue to own a majority of the voting power of shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the New York Stock Exchange (“NYSE”) NYSE. See “Management—Controlled Company Exception.”

We intend to apply to have our Class A common stock listed on the NYSE under the symbol “XTF.”

 

 

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 30.

Neither the Securities and Exchange Commission (“SEC”) nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discount and commissions

   $        $    

Proceeds to us before expenses(a)

   $        $    

Proceeds to the selling stockholders before expense

   $        $    

 

(a)

See “Underwriting” for additional compensation to be paid to the underwriters.

We and the selling stockholders have granted the underwriters the option to purchase up to an additional                  shares of Class A common stock, solely to cover over-allotments, if any.

The underwriters expect to deliver the shares against payment in New York, New York on                 , 2019 through the book-entry facilities of The Depository Trust Company.

 

 

 

Citigroup   Wells Fargo Securities

Prospectus dated                 , 2019


Table of Contents

TABLE OF CONTENTS

 

     Page  

ABOUT THIS PROSPECTUS

     ii  

SUMMARY

     1  

RISK FACTORS

     30  

FORWARD-LOOKING STATEMENTS

     59  

ORGANIZATIONAL STRUCTURE

     61  

USE OF PROCEEDS

     67  

DIVIDEND POLICY

     68  

CAPITALIZATION

     69  

DILUTION

     70  

UNAUDITED PRO FORMA FINANCIAL INFORMATION

     72  

SELECTED HISTORICAL FINANCIAL DATA

     79  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     82  

OUR BUSINESS

     121  

MANAGEMENT

     139  
 

 

 

Neither we nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. Neither we nor the underwriters take any responsibility for, or can provide any assurance as to the reliability of, any information other than the information in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by us or on our behalf. We and the underwriters are offering to sell, and seeking offers to buy, our shares only in jurisdictions where offers and sales thereof are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our shares. Our business, prospects, financial condition and results of operations may have changed since that date.

 

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ABOUT THIS PROSPECTUS

Basis of Presentation

In connection with the consummation of this offering, we will effect certain reorganizational transactions, which we refer to collectively as the “Reorganization Transactions.” Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the Reorganization Transactions and the consummation of this offering. See “Organizational Structure” in this prospectus for a description of the Reorganization Transactions and a diagram depicting our organizational structure after giving effect to the Reorganization Transactions and the consummation of this offering.

As used in this prospectus, unless the context otherwise requires, references to:

 

   

“we,” “us,” “our,” the “Company,” “Exeter” and similar references refer, unless otherwise indicated or the context otherwise requires: (i) prior to the consummation of the Reorganization Transactions and the consummation of this offering, to Exeter Finance LLC and its consolidated subsidiaries; and (ii) following the consummation of the Reorganization Transactions and the consummation of this offering, to Exeter Finance Corporation, the issuer of the Class A common stock offered hereby, and its consolidated subsidiaries, including Exeter Finance LLC. We also refer to Exeter Finance Corporation as the “Issuer”; and

 

   

“Blackstone” refer to certain investment funds affiliated with The Blackstone Group L.P.

Certain monetary amounts, percentages and other figures included elsewhere in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables or charts may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them. Average balances are calculated as the sum of month end balances for the period divided by the number of month end balances. For example, 2017 annual average total assets represents the month end total assets balances for December 2016 through December 2017 divided by thirteen periods.

Market, Industry and Other Data

Market, industry and other data used in this prospectus has been obtained from independent industry sources and publications, including the following:

 

   

Federal Reserve Bank of New York;

 

   

Bureau of Labor Statistics;

 

   

Manheim, Inc.;

 

   

JD Power PIN Navigator; and

 

   

Experian Information Solutions, Inc. (“Experian”).

The information supplied by J.D. Power and Associates’ Information Network (“PIN”) is based on data believed to be reliable but is neither all-inclusive nor guaranteed by PIN. Without limiting the generality of the foregoing, specific data points may vary considerably from other information sources. Any opinions expressed herein reflect the judgment of Exeter at this date and are subject to change.

For purposes of this prospectus, we categorize the prime segment as consumers with FICO® Scores of 660 and above, the super prime segment as a portion of consumers within the prime segment with FICO® Scores of 720 and above, the non-prime segment as consumers with FICO® Scores below 660 and the sub-prime segment as consumers with FICO® Scores below 620.

FICO® is a registered trademark of Fair Isaac Corporation in the United States and other countries. FICO® Scores are provided by Fair Isaac Corporation and are designed to measure the likelihood that a consumer will pay his or her credit obligations as agreed.

 

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Market data and industry statistics and forecasts used throughout this prospectus are based on the good faith estimates of management, which in turn are based upon management’s reviews of independent industry publications, reports by market research firms, and other independent and publicly available sources. Unless we indicate otherwise, market data and industry statistics used throughout this prospectus are for the year ended December 31, 2017. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this prospectus. See “Forward-Looking Statements” in this prospectus.

Although we are not aware of any misstatements regarding the industry data that we present in this prospectus, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors,” “Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus.

Trademarks, Service Marks and Trade Names

We own or license the trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. This prospectus also may contain trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this prospectus are listed without the TM, SM, © and ® symbols, but we will assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors, if any, to these trademarks, service marks, trade names and copyrights.

Glossary of Selected Terms

This Glossary includes acronyms and defined terms that are used throughout this prospectus.

AGR—Average gross receivables related to retail installment contracts on our consolidated balance sheets.

AMR—Average managed gross receivables related to retail installment contracts include retail installment contracts on our consolidated balance sheets and retail installment contracts we service for third parties.

APR—Annual percentage rate related to retail installment contracts.

Charge-offs—Represents the carrying amount of a retail installment contract that has been discharged in order to remove the retail installment contract from our consolidated balance sheet at the time of resolution, regardless of when the impact of the credit loss was recorded on our Consolidated Statements of Operations.

Credit enhancement—A financial arrangement, such as overcollateralization, cash reserve account, excess spread, insurance or a third party guarantee, that is designed to reduce credit risk by partially or fully compensating an investor in the event of specified losses.

Delinquency—A failure to make timely payments of principal and/or interest on a retail installment contract.

FICO®FICO® is a registered trademark of Fair Isaac Corporation in the United States and other countries. FICO® Scores are provided by Fair Isaac Corporation and are designed to measure the likelihood that a consumer will pay his or her credit obligations as agreed. Our credit score data is based on FICO® Scores. FICO® Scores are currently the most commonly used credit scores by lending institutions. FICO® Scores are ranked on a scale of approximately 300 to 850 points, with a higher value indicating a lower likelihood of credit

 

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default. A consumer may also have a zero credit score due to a limited credit history. The FICO® Scores presented in our reports represent the FICO® Scores of the consumer at either the time of the retail installment contract origination or our purchase and may not be indicative of the current credit worthiness of the consumer.

LIBOR—London Interbank Offered Rate.

LTV ratio—Loan-to-value ratio—The ratio of the amount financed to the value of the automobile that serves as collateral for the retail installment contract, expressed as a percentage at the time the retail installment contract is acquired.

Managed portfolio—Refers to our portfolio of purchased retail installment contracts reflected on our consolidated balance sheets as well as retail installment contracts we service for third parties.

Manheim Used Vehicle Value Index—The Manheim Used Vehicle Value Index is used by both financial and economic analysts as an indicator of pricing trends in the used vehicle market. By applying statistical analysis to its database of more than five million used vehicle transactions annually, Manheim has developed a measurement of used vehicle prices that is independent of underlying shifts in the characteristics of vehicles being sold.

Non-accrual loan—A retail installment contract for which we are not accruing interest income. We place retail installment contracts on non-accrual status when we believe collectability of principal and interest in full is not reasonably assured, which generally occurs when a retail installment contract is more than 60 days past due or is in bankruptcy status.

Non-prime—Generally refers to the credit risk classification of a retail installment contract. There is no universally accepted definition of non-prime. The non-prime segment of the automobile industry primarily serves consumers with poorer credit payment histories and such retail installment contracts typically have a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than prime retail installment contracts, including those consumers with sub-prime FICO® Scores. Such characteristics might include, among other factors, a combination of high LTV ratios, low down payments, limited credit histories or low credit scores. In this prospectus, we refer to consumers with FICO® Scores of less than 660 as “non-prime consumers.”

Overcollateralization—A credit enhancement method whereby excess collateral is posted to obtain financing.

Performing retail installment contracts—Retail installment contracts where the consumer is 60 days or less past due, and not in bankruptcy or repossession.

Retail installment contracts—Consist of retail installment contracts originated by automobile dealers for assignment to Exeter. Our contracts are originated in accordance with Exeter’s credit policies. The obligors under our contracts are primarily consumers who have experienced prior credit difficulties and generally have credit bureau scores ranging from 450 to 670.

Risk adjusted return—Risk adjusted return is the financial return Exeter’s investment has made relative to the risk incurred where higher financial returns are required for higher risk loans and lower financial returns are required for lower risk loans.

TDR—Troubled debt restructuring. A restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. For Chapter 13 bankrupt consumer accounts, a concession is considered granted when the plan terms (loan balance, rate payment, and remaining term) are confirmed with the bankruptcy court. For all other loans, a TDR is defined as: (i) a loan that has received cumulative payment extensions, or other modifications, in an amount that totals 10% or more of the loan balance at the time of the most recent modification; and, (ii) subsequently the consumer account becomes more than 60 days past due at the end of the quarter.

 

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Trusts—Special purpose financing vehicle utilized in our securitized financing transactions.

UPB—Unpaid principal balance.

Vintage analysis—A method of evaluating the credit quality of a loan portfolio by analyzing net charge-offs in a given loan pool where the loans share the same origination period. It allows the financial institution to calculate the cumulative loss rates of a specific loan pool, thereby determining the loan pool’s lifetime expected loss experience.

Warehouse facility—A revolving line of credit generally used to fund retail installment contract originations.

Yield curve—A graphical display of the relationship between yields and maturity dates for bonds of the same credit quality.

 

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SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in shares of our Class A common stock. You should read this entire prospectus carefully, including the “Risk Factors” section immediately following this summary, the consolidated financial statements and the related notes thereto and management’s discussion and analysis thereof included elsewhere in this prospectus, before making an investment decision to purchase our Class A common stock.

Our Company

We are an industry leading, full-service, technology and data-driven specialty finance company, operating in the U.S. automobile finance market since April 2006. Our business is to underwrite, purchase, service, and securitize retail installment contracts, which we refer to as either retail installment contracts or auto loans, from automobile dealers. We service auto loans that we own, as well as auto loans owned by third parties. Through our retail installment contract purchases, we provide indirect financing for new and used vehicles, primarily to consumers with FICO® Scores of less than 660, which we refer to as non-prime consumers, with a particular focus on consumers with FICO® Scores of less than 620, which we refer to as sub-prime consumers. We serve as a source of financing for automobile dealers, facilitating vehicle sales to consumers with non-prime, including sub-prime, FICO® Scores, and as such we provide financing to underserved consumers. We believe having a personal vehicle is mission-critical for many of these consumers, particularly in serving as a means of transportation for employment, therefore consumers prioritize re-paying these auto loans.

We are led by an experienced management team, including our Chief Executive Officer, Jason Grubb, who joined us in 2016 and brings 27 years of experience in the automobile finance industry. Our management team is focused on executing our strategy of generating appropriate risk-adjusted financial returns by optimizing pricing across credit tiers, resulting in improving risk-adjusted yields and stabilizing default frequency, while gaining operating efficiency through increasing portfolio scale, enhanced automation and ongoing process optimization.

As of September 30, 2018, we had a $4.0 billion managed portfolio of retail installment contracts with an average FICO® Score at origination of 567, of which 78% was comprised of used auto loans. For the nine months ended September 30, 2018, we purchased $1.8 billion of retail installment contracts with an average FICO® Score of 568, of which 76% was comprised of used auto loans. In addition, for the nine months ended September 30, 2018, we generated $57.4 million of net income, compared to $12.1 million for the nine months ended September 30, 2017.

From retail installment contract underwriting and purchasing through servicing, our comprehensive end-to-end operating platform is rooted in technology-enabled processes that leverage our extensive automobile finance industry knowledge and non-prime consumer data. Our centralized, automated consumer credit application process, coupled with dynamic risk-adjusted pricing and predictive loss forecasting, seeks to achieve consistent risk-adjusted financial returns on a loan by loan basis. Our customized third-party model-driven underwriting technology enables us to return a credit decision to dealers typically within 30 seconds. We also employ established centralized account management policies to determine appropriate account treatment, driving efficiencies in servicing along with fair and consistent treatment of consumers.

We believe our earnings growth is evidence that our extensive data and advanced analytics enhance our retail installment contract origination, servicing and risk management operating platform. Furthermore, we believe our operating platform and associated technologies are readily scalable, efficiently supporting continued growth and providing substantial operating leverage, without compromising our credit performance.



 

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We have a robust and diverse funding structure with established capital markets access to support our automobile finance lending operations. This includes:

 

   

a $1.75 billion three year warehouse facility with four commercial banks;

 

   

$8.6 billion of asset-backed term securitization (“ABS”) issuances across 19 transactions since 2012 and through September 30, 2018;

 

   

a $175.0 million unsecured note issued in June 2018 and due in June 2023; and

 

   

a servicing-retained forward flow sale agreement with an institutional investment group for the sale of up to $900.0 million of retail installment contracts through March 2020.

Our Origination Channels

We focus our automobile dealer marketing efforts across differentiated and diverse origination channels, each with attractive expected levels of risk-adjusted financial returns, that we believe improve optionality in varying market environments.

As of September 30, 2018, we had relationships with approximately 276,000 consumers and approximately 10,500 dealers across 49 states. We also have strong partnerships with select large dealer groups, OEM captive finance companies (“Captives”) and banks, and are currently seeking partnerships with Original Equipment Manufacturers (“OEMs”). These partnerships provide us broad and diverse access to profitable origination channels.

Our Core Channels consist of:

 

   

Franchise Dealers—This channel primarily consists of single individual owner-dealers that have one or more locations, typically located in close proximity to one another.

 

   

Franchise Dealer Groups—These groups are typically corporate-owned, feature several regional or national locations and generally operate with strong dealer oversight and collateral standards.

 

   

Independent Used Car Dealers—Used car dealerships unaffiliated with an OEM comprise this channel. We seek relationships with large Independent Used Car Dealers with strong established retail installment contract performance.

Our Strategic Partnership Channels consist of:

 

   

Independent Dealer Group Partnership—Consumer credit applications that are not approved by the dealer captive finance company are passed directly to us and select other lenders. We believe that retail installment contracts purchased from our Independent Dealer Group Partnership benefit from a limited amount of competing lenders.

 

   

Captive Partnerships—Consumer credit applications that do not fit a Captive’s underwriting criteria and/or risk appetite are forwarded to us directly from that Captive. Receiving applications prior to other lenders generally improves our retail installment contract capture rates and lowers origination costs.

 

   

OEM Partnership—We seek to establish OEM partnerships that may offer select participating lenders general market incentives (a subsidy provided by the OEM to the lender which is passed through to the consumer or the sourcing dealer) or may receive direct pay subvention on select vehicle makes and models. We believe subvention generally increases retail installment contract capture rates, as other lenders are not provided the same credit subsidy.



 

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Bank Partnership—We receive consumer credit applications from a bank partner when they do not fit that bank’s underwriting criteria and/or risk appetite. Sourcing consumer credit application volume through these partnerships is operationally efficient and allows bank partners to broaden and deepen their automobile dealer product offerings.

We establish relationships within our Core Channels through our dealer sales managers (“DSMs”), who contact prospective dealers to explain our retail installment contract purchase programs and thereafter provide ongoing dealer training and support services. Our DSMs represent us exclusively and manage dealer relationships within targeted geographic areas.

Our Strategic Partnership Channels are supported by our centralized team and dedicated staff. These relationships value incremental sales, specifically in the non-prime automobile financing market, and work with us to maximize these incremental sales opportunities.

We believe our technology-based platform facilitates our integration with dealers and other retail installment contract originators, positioning us to expand our dealer and partnership relationships in the large and fragmented non-prime automobile financing market.

The charts below show the increase in volume of our originations since 2016 and the contribution of each of our origination channels between our Strategic Partnership Channels and Core Channels.

Originations

 

2016   2017  

Nine Months Ended

September 30, 2018

 

LOGO

 

 

LOGO

 

 

LOGO

 

Total Volume: $1.3 Billion

 

 

Total Volume: $1.7 Billion

 

 

Total Volume: $1.8 Billion

Our Strengths

We believe the following strengths support our ability to capitalize on the growth prospects for our business.

Well Positioned in a Large and Fragmented Market

We provide indirect automobile financing to underserved consumers that do not typically have access to prime credit terms for the purchase of new and used vehicles. Our consumers are dependent upon these vehicles for transportation to work, school, and other essential daily requirements, making the demand for non-prime



 

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financing a critical component of the consumer finance market for vehicle purchases. The non-prime automobile financing market represents a large addressable opportunity in a competitive landscape that is highly fragmented.

 

   

There were over $400.0 billion of total auto loan outstanding balances with a FICO® Score at origination of less than 660 as of September 30, 2018 (Experian, September 2018).

 

   

For the nine months ended September 30, 2018, originations with a FICO® Score lower than 660 totaled over $141.0 billion. From 2012 to 2018, annual originations with a FICO® Score lower than 660 averaged $169.5 billion (New York Federal Reserve Bank Consumer Credit Panel, November 2018).

 

   

The largest participant in the sub-prime automobile finance space had market share of less than 20%, only four individual lenders had greater than a 5% market share and the top 10 lenders had market share of less than 65% in the aggregate in the third quarter of 2018 (J.D. Power and Associates’ Power Information Network PIN, September 2018).

We believe the large and fragmented nature of the non-prime automobile finance market, coupled with our growing market position and scalable operating platform, supports our ability to profitably grow our business.

Full-service, Scalable Automobile Financing Platform

We have developed a full-service automobile financing platform with underwriting, purchasing, credit risk management, compliance, and servicing capabilities to support our growth strategy. With primary operations in Irving, Texas, we employ a centralized approach across functions to support our efficient, disciplined and compliance-focused operations. We have made significant investments in staffing, processes and customized systems. Our corporate infrastructure is designed to scale efficiently, and we believe we can support a significantly larger portfolio at a modest marginal operating cost, providing the opportunity to meaningfully increase operating leverage.

Centralized Data-Driven Processes and Technology Drive Strong and Predictable Performance

Our operating discipline, which leverages centralized, automated data-driven processes and technology, has driven strong performance as demonstrated by our increased net income, stabilized credit performance and overall improved profitability. In particular, we have improved our ability to forecast unit losses, which we believe enables us to price appropriately on a risk-adjusted basis, and reduces volatility in financial results.

We have developed proprietary software applications across our platform, including underwriting and servicing, that we believe are highly effective and that leverage nearly 12 years of consumer behavior data across varying credit cycles. We believe these applications enhance our ability to effectively monitor and manage risk on a real-time basis and at a highly granular level, including, but not limited to, origination vintage, channel, dealer, and vehicle collateral.

Our expansive data—both internally generated and from third-party providers—is used to adapt our pricing, servicing and credit risk management models to incorporate and reflect evolving consumer behavior and product performance.

Experienced Management Team

Our senior management team consists of professionals with deep experience in the automobile finance industry who combine sector-specific origination and transaction expertise with operations, business strategy and infrastructure development skills. Our senior management team has approximately 20 years of experience, on average, in the automobile finance industry, including managing credit risk and servicing retail installment contracts through multiple economic cycles.



 

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Led by our Chief Executive Officer, Jason Grubb, who has over 27 years of experience in the automobile finance industry, our management team has an established track-record at market leading automobile finance companies of building and leading multi-billion dollar automotive finance businesses.

Access to Robust Financing Markets to Fund Growth

To fund new retail installment contract purchases, we rely primarily on our warehouse facility and the ABS market. Currently, we have a $1.75 billion warehouse facility that matures in June 2021. Since 2012, we have successfully executed 19 ABS transactions totaling $8.6 billion in total bond issuances. Our ABS program’s senior tranches have recently received the highest investment grade rating from national rating agencies, which we believe enhances our access to ABS capital and improves terms.

Historically, the secured lending markets for non-prime retail installment contracts have been deep and liquid, with accessibility maintained throughout different economic cycles. For example, automotive ABS issuances continued during the economic downturn in 2008 and 2009, enabling lenders to support new originations. We believe our reputation with lenders and track record enhance our ability to access funding and liquidity through varying economic cycles.

In addition, in the first quarter of 2018, we established a servicing-retained forward flow sale agreement with an institutional investment group, under which we have executed three retail installment contract portfolio sales. For the nine months ended September 30, 2018, we received approximately $270.2 million in cash proceeds from these loan sales, resulting in a $13.7 million gain. The forward flow sale agreement is a two-year contract through which we plan to sell a representative sample of approximately 17% of our new retail installment contract purchases each quarter through March 2020 and retain a servicing fee of approximately 3% on the outstanding balances of the portfolios sold. This arrangement offers an additional source of liquidity to fund operations and provides an attractive incremental source of fee income to supplement our automobile finance business.

Attractive Financial Profile Positioned for Continued Earnings Growth

We have achieved substantial growth in profits with net income for the nine months ended September 30, 2018 and 2017 of $57.4 million and $12.1 million, respectively. In 2016, under our new management team, we completed a transition from a top-line, revenue-based strategy focused on increasing volume and market share to a strategy more focused on profitability. This involved focusing on profitable pricing and optimal contract terms utilizing our automated underwriting capabilities, as well as eliminating underperforming dealers and focusing more on partnership channels. We estimate that by the end of fiscal year 2018, approximately 85% of our portfolio will be comprised of 2016 and more recent originations. We believe our scalable, technology and data-driven platform provides for further meaningful upside, spurred by three core drivers:

 

   

Phasing-in of Improved Vintage Economics—As legacy vintages that were originated prior to the launch of our new strategy in early 2016 mature or are repaid, our portfolio is being replenished with more recent origination vintages anticipated to be more profitable, providing meaningful incremental earnings growth as the portfolio turns over. For instance, for the nine months ended September 30, 2018 and 2017, our yield on loan receivables was 20.64% and 19.81%, respectively, and for the years ended December 31, 2017, 2016 and 2015, our yield on loan receivables was 19.37%, 18.55%, and 18.42%, respectively.

 

   

Platform Scalability—Our incremental operating leverage is driven by: (i) operating discipline; (ii) system and process enhancements; (iii) continued emphasis on growth of cost-efficient partnerships; and (iv) portfolio growth. We believe our platform can support growth of the portfolio without significant incremental corporate and system infrastructure costs.



 

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Origination Volume Growth—We believe there is potential for balance sheet growth through the expansion of our core dealer base and dealer group program, coupled with the continued expansion of our partnership programs. We also believe our large addressable market and the fragmented nature of the industry provide meaningful opportunity for continued growth. Exeter’s market share of outstanding sub-prime retail installment contracts was 2.8%, according to J.D. Power and Associates’ Power Information Network PIN as of September 30, 2018.

Our Business and Growth Strategy

Our primary goal is to create stockholder value by leveraging our systems, data, liquidity, management knowledge and industry experience to grow profitably within our industry while efficiently and effectively deploying our capital and funding. We seek to continue growth in earnings through increased market penetration in our Core Channel with both new and existing dealerships and increased volume in our Strategic Partnership Channel.

We believe we are a key player in the U.S. non-prime automobile finance market, with multiple origination channels and a deep understanding of consumer credit behavior across operating environments.

Organic Growth with Both New and Existing Dealerships

We intend to leverage our existing infrastructure to grow our market share with new and existing dealer relationships. Our market opportunities include:

 

   

increasing penetration within the approximately 4,000 unsigned franchise dealers in Exeter’s credit space; and

 

   

improving market share with existing dealer relationships through continued program improvements and increased service levels.

Expansion and Maturation of our Partnership Channel

We currently have partnerships with two large Captives, one bank partner and one large used car dealer group, whereby we review credit applications they have declined due to the prospective consumers not meeting their credit profile criteria. These applications are forwarded to us for a credit decision and in certain circumstances, before the origination sourcing dealership markets the application with our competitors.

We benefit from our partners’ application volumes and consumer brand awareness, while the partner leverages our underwriting and funding capabilities in serving this market segment. These partnerships provide us with attractive incremental new origination opportunities with the potential for growth in originations, improved efficiency through higher capture rates, and in certain cases, the ability to receive subvention revenue.

We believe our technology-based operating platform facilitates integration with other originators, positioning us well for further growth opportunities.



 

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Our Market

According to the Federal Reserve Bank of New York, the non-mortgage consumer finance industry in the United States has approximately $4.4 trillion of outstanding borrowings as of the third quarter of 2018, including vehicle loans, credit cards, home equity lines of credit, private student loans and personal loans. Since the 2008–2009 U.S. economic downturn, there has been a significant increase in demand for consumer financing, particularly to finance vehicle sales.

 

Q3 2009 Non-Mortgage

Consumer Debt Outstanding

 

 

Q3 2018 Non-Mortgage

Consumer Debt Outstanding

 

$3.3 Trillion Outstanding   $4.4 Trillion Outstanding

 

LOGO

 

 

LOGO

Source: Federal Reserve Bank of New York, Q3 2018 Report on Household Debt and Credit



 

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We focus on the U.S. automobile finance segment of the U.S. consumer finance market. According to Experian, as of September 30, 2018, there were approximately $1.2 trillion of auto loans outstanding with respect to new and used vehicles, with finance companies increasing their market share from 11% in 2009 to 17% in 2018. Finance companies and credit unions have benefited from the market dislocation caused by U.S. financial institutions reducing their non-prime auto lending and tighter lending standards at U.S. banks, according to the Federal Reserve’s Senior Loan Officer Survey.

Auto Loans Outstanding ($ billions)

 

 

LOGO

Source: Experian, “State of the Automotive Finance Market.” Information above includes auto loans outstanding with respect to both new and used vehicles.

The new and used sub-prime automobile finance market is highly fragmented, with no individual lender having more than 20% market share, only four individual lenders having greater than a 5% market share and the top 10 lenders having market share of less than 65% in aggregate in the third quarter of 2018, as defined by JD Power PIN Navigator. Over this period, Exeter’s market share of outstanding sub-prime retail installment contracts was 2.8%, which ranked 8th among lenders behind two banks, three captives and two other finance companies (J.D. Power and Associates’ Power Information Network PIN, for the nine months ended September 30, 2018).



 

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According to Experian, “State of the Automotive Finance Market,” as of September 30, 2018, approximately 38% of loan balances related to auto loans for both new and used vehicles were made to non-prime consumers, equating to over $400.0 billion in auto loans outstanding. Further growth may occur within this target consumer segment upon, for instance, potential expansion among millennials with newly developing credit histories.

Auto Loans Outstanding by FICO® Score ($ billions)

 

 

LOGO

Source: Experian, “State of the Automotive Finance Market.” Information above includes auto loans outstanding with respect to both new and used vehicles.

Sub-prime used car financing comprises the majority of our business. According to Experian, “State of the Automotive Finance Market,” as of September 30, 2018, used automobiles accounted for 54% of total automobiles sold in the United States in 2018, with approximately 53% of used car purchases financed. In addition, more than 49% of the loans in the used automobile finance space were extended to non-prime consumers, which includes sub-prime consumers.

Non-prime retail installment contracts typically produce higher yields and experience higher credit losses than retail installment contracts with prime credit score consumers. Effectively pricing loans in the non-prime market requires a level of experience, industry knowledge and a data-driven adaptive operating platform.

Overall, the U.S. vehicle sales market is large and has experienced significant recent growth supported by positive fundamentals for the U.S. consumer:

 

   

The U.S. unemployment rate has fallen to 3.7%, one of the lowest levels since April 2000 (Bureau of Labor Statistics, September 2018).

 

   

The U.S. Energy Information Administration forecasts that gasoline prices will average $2.73 per gallon in 2018 and $2.50 per gallon in 2019, up from $2.42 per gallon in 2017 but meaningfully lower from the roughly $3.50 per gallon experienced from 2011 throughout 2014. (U.S. Energy Information Administration, September 2018).



 

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U.S. Real GDP is expected to grow at a rate of 2.9% in 2018 and 2.6% in 2019 (Bloomberg, November 2018).

 

   

The U.S. consumer confidence index sits at 135.7 and remains near ten-year highs (Conference Board: Consumer Confidence Survey, November 13, 2018).

 

   

The U.S. household Debt Service Ratio remains well below historical averages in the current economic cycle (Federal Reserve, November 30, 2018).

Resiliency of Automobile Financing Industry

Auto loans performed well during the 2008-2009 financial crisis and were less adversely impacted than other consumer lending products. We believe this performance was largely attributable to the following factors:

 

   

the strength of the used vehicle market;

 

   

the strength of leased vehicle residual values which represent the estimated wholesale value of the vehicle at the end of the lease term;

 

   

the importance that automobiles serve in consumers’ everyday lives; and

 

   

the ability to locate, repossess, and sell a vehicle to mitigate losses on defaulted auto loans.

The automobile finance industry has historically been cycle-resilient as consumers rely on vehicles for mission-critical tasks in their everyday lives (e.g., commuting to work). The strength and resiliency of the automobile finance industry was exhibited throughout the 2008-2009 financial crisis through a variety of metrics, including:

 

   

S&P did not downgrade any sub-prime auto loan ABS bonds during the financial crisis, according to Capital IQ rating actions reports.

 

   

As exhibited by the Manheim Used Vehicle Index, a measure of wholesale used car prices adjusted by their mileage or vintage, the overall used car market has shown strength and resiliency. The Manheim Used Vehicle Index has recently been well above historical norms and, during the economic downturn, it rebounded in nine months while the broader economy took several years to rebound. This strength in the used car market reflects the importance of vehicles to U.S. consumers.



 

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Manheim Used Vehicle Index

 

 

LOGO

Source: Manheim, Inc. November 2018

Note: Indexed to a basis of 100 at 1995 levels.



 

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The automobile finance industry demonstrated significant outperformance compared to other relevant consumer asset classes. For example, the automobile finance industry outperformed the mortgage market in terms of both origination and delinquency rates during such period.

 

90+ Day Delinquency Rate (Q4)   Subprime Originations (<620 FICO® Score)

 

 

LOGO

 

 

 

LOGO

 

(a) CAGR - Compound Average Growth Rate

Source: Federal Reserve Bank of New York

 

Risk Factors

Investing in our Class A common stock involves substantial risks, and our ability to successfully operate our business and execute our growth plan is subject to numerous risks, including those that are generally associated with operating in the automobile finance industry. Some of the more significant risks include the following:

 

   

We need substantial liquidity to operate our business.

 

   

We depend on our ability to securitize our portfolio of retail installment contracts to provide permanent financing for these contracts.

 

   

Our profitability and financial condition could be materially adversely affected if the value of used cars declines resulting in lower recoveries in sales of repossessed vehicles.

 

   

We depend on cash flows from our residual interests in our securitization program and our warehouse credit facility.

 

   

If a significant number of our retail installment contracts experience defaults, our results of operations and liquidity may be impaired.

 

   

Our consolidated results of operations and financial condition and our consumers’ ability to make payments on their retail installment contracts have been, and may in the future be, adversely affected by economic conditions and other factors that we cannot control.

 

   

Our allowance for credit losses and impairments may prove to be insufficient to absorb losses inherent in our retail installment contracts portfolio.

 

   

If we default in our servicing obligations, a servicer termination event could occur with respect to the relevant asset-backed securities, and we could be replaced as servicer.



 

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If an increase in interest rates results in a decrease in our cash flows from excess spread, our results of operations may be impaired.

 

   

If we are unable to compete successfully with our competitors, our results of operations may be impaired.

 

   

Our indebtedness is significant, which could affect our ability to meet our obligations under our debt instruments and could materially and adversely affect our business and ability to react to changes in the economy or our industry.

 

   

Loss of our key management or other personnel, or an inability to attract such management and other personnel, could materially and adversely affect our business, financial condition and results of operations.

 

   

Poor portfolio performance may trigger credit enhancement provisions in our warehouse facility or securitizations.

 

   

Negative changes in the business of the OEMs with which we seek strategic relationships or of our other strategic partners, including the Independent Dealer Group, could materially and adversely affect our business, financial condition and results of operations.

 

   

Immediately following this offering, Blackstone and its affiliates will control us and their interests may conflict with ours or with other stockholders in the future.

 

   

Upon the listing of our shares of Class A common stock on the                 , we will be a “controlled company” within the meaning of                rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. As a result, investors will not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

   

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

State licensing laws and regulations may delay, discourage or otherwise impede investors from purchasing our Class A common stock.

Before you participate in this offering, you should carefully consider all of the information in this prospectus, including matters set forth under the heading “Risk Factors.”

Summary of Offering Structure

As used in this prospectus, “existing owners” refers, collectively, to the indirect equity owners of Exeter Finance LLC, including affiliates of Blackstone, prior to the Reorganization Transactions; “Continuing LLC Owners” refers to those existing owners who will retain after the Reorganization Transactions equity ownership in both Exeter Finance LLC in the form of common units (“LLC Units”) and Exeter Finance Corporation in the form of Class B common stock; “Continuing Common A Owners” refers to those existing owners who will retain after the Reorganization Transactions equity ownership in Exeter Finance Corporation in the form of Class A common stock; and the “Issuer” refers to Exeter Finance Corporation, the issuer of the Class A common stock offered hereby.

Prior to this offering, we will execute a series of transactions, which we refer to herein as the “Reorganization Transactions” (as more fully described under “Organizational Structure—Reorganization Transactions”), such that subsequent to the Reorganization Transactions and this offering, we will conduct our business through what is commonly referred to as an Umbrella Partnership—C Corporation or “Up-C” structure, which is often used by partnerships and limited liability companies when they decide to undertake an initial public offering.



 

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The Up-C structure allows existing owners of a partnership or limited liability company to continue to realize the tax benefits associated with their ownership in an entity that is treated as a partnership for income tax purposes following an initial public offering.

Following the consummation of the Reorganization Transactions, Exeter Finance Corporation will be a holding company and its sole principal asset will be its equity interest in Exeter Finance LLC, the “operating partnership.” Exeter Finance Corporation will operate and control all of the business and affairs and consolidate the financial results of Exeter Finance LLC and its subsidiaries. Prior to the completion of this offering, Exeter Finance LLC will amend and restate its limited liability company agreement (the “New LLC Agreement”) to, among other things, modify its capital structure by converting the different classes of interests currently held by its existing owners into two classes of limited liability company interests of Exeter Finance LLC. Pursuant to the New LLC Agreement, the Continuing LLC Owners (or certain permitted transferees thereof) will have the right to exchange their LLC Units, together with an equal number of shares of Class B common stock of Exeter Finance Corporation, for shares of Exeter Finance Corporation’s Class A common stock on a one-for-one basis, subject to customary adjustments for stock splits, stock dividends, reclassifications and other similar transactions, or for cash (based on the market price of the shares of Class A common stock), at the option of Exeter Finance LLC (such determination to be made by the independent members of our Board of Directors acting on our behalf in our capacity as managing member of Exeter Finance LLC).

See “Risk Factors—Risks Related to Our Organization and Structure,” “Organizational Structure and “Certain Relationships and Related Party Transactions” in this prospectus.



 

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The simplified diagram below depicts our organizational structure immediately following the Reorganization Transactions and this offering, assuming no exercise by the underwriters of their over-allotment option.

 

 

LOGO

Corporate Information

Exeter Finance Corporation was incorporated in the State of Delaware on July 20, 2018. We are a newly formed corporation, have no material assets and have not engaged in any business or other activities except in connection with our incorporation and with the Reorganization Transactions described under “Organizational Structure.” Our principal executive offices are located at 222 W. Las Colinas Blvd., Suite 1800, Irving, TX 75039, our telephone number is (214) 572-8278, and the address of our website is www.exeterfinance.com. The information contained in, or that can be accessed through, our website is not incorporated by reference into, and is not part of, this prospectus.

Our Sponsor

The Blackstone Group L.P., one of the world’s leading global investment and advisory firms, was founded in 1985. Blackstone’s alternative asset management businesses include the management of corporate private equity funds, real estate funds, funds of hedge funds, credit-oriented funds, collateralized obligation vehicles and



 

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closed-end mutual funds. Blackstone also provides various financial advisory services, including mergers and acquisitions advisory, restructuring and reorganization advisory, and fund placement services. Through its different businesses, as of September 30, 2018, Blackstone had total fee-earning assets under management of approximately $342 billion. Immediately following this offering, Blackstone and its affiliates will hold     % of the combined voting power of our Class A and Class B common stock (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock to cover over-allotments). Moreover, under our bylaws and the stockholders’ agreement with Blackstone and its affiliates, subject to the terms set forth therein, Blackstone will have the right to nominate to our board individuals designated by Blackstone. See “Risk Factors—Immediately following this offering, Blackstone and its affiliates will control us and their interests may conflict with ours or yours in the future,” “Organizational Structure and “Certain Relationships and Related Party Transactions” in this prospectus.



 

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THE OFFERING

 

Issuer

Exeter Finance Corporation

 

Class A common stock offered by us

                 shares

 

Class A common stock offered by the selling stockholders

                 shares

 

Underwriters’ option to purchase additional shares of Class A common stock

We and the selling stockholders have granted the underwriters an option to purchase up to an additional                  shares of Class A common stock, solely to cover over-allotments, if any.

 

Class A common stock outstanding after this offering and the use of proceeds

                 shares of Class A common stock (or                  shares if the underwriters’ over-allotment option is exercised in full). If all then-outstanding exchangeable LLC Units were exchanged (with automatic cancellation of an equal number of shares of Class B common stock) for newly issued shares of Class A common stock,                  shares of Class A common stock (or                  shares if the underwriters’ over-allotment option is exercised in full) would be outstanding.

 

Class B common stock outstanding after this offering and the use of proceeds

                 shares of Class B common stock (or                  shares if the underwriters’ over-allotment option is exercised in full), equal to one share per LLC Unit (other than any LLC Units owned by Exeter Finance Corporation).

 

Voting

Each share of Class A common stock and Class B common stock entitles its holder to one vote on all matters to be voted on by stockholders generally, except that no stockholder or group (other than Blackstone and its affiliates) which beneficially owns in the aggregate more than 9.99% of the total voting power of all the then-outstanding shares of our capital stock as of any record date for the determination of stockholders entitled to vote on any matter shall be permitted to vote more than 9.99% of the total voting power of all the then-outstanding shares of our capital stock entitled to vote on matters presented to our stockholders for their vote or approval without the required notice or consent for voting such shares having been provided or obtained as required by any federal, state or local consumer or other law, regulation or regulatory authority applicable to or having jurisdiction over us or any of our subsidiaries. See “Description of Capital Stock—Common Stock.”


 

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  After this offering and the use of proceeds therefrom as described under “Use of Proceeds,” the Continuing LLC Owners will hold an equal number of shares of Class B common stock and LLC Units. The shares of Class B common stock have no economic rights, but each share of Class B common stock initially entitles its holder to one vote on all matters to be voted on by stockholders generally. See “Description of Capital Stock—Common Stock—Class B Common Stock.”

 

  Holders of our Class A and Class B common stock vote together as a single class on all matters presented to our stockholders for their vote or approval, except as otherwise required by applicable law or our Certificate of Incorporation.

 

  Immediately following this offering and the use of proceeds therefrom as described under “Use of Proceeds,” Blackstone and its affiliates will hold     % of the combined voting power of our Class A and Class B common stock (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock to cover over-allotments, if any).

 

Voting power held by holders of Class A common stock after giving effect to this offering and the use of proceeds

    % (or 100% if all outstanding LLC Units held by the Continuing LLC Owners were exchanged (with automatic cancellation of all outstanding shares of Class B common stock) for newly issued shares of Class A common stock), of which     % will be held immediately after this offering by the Continuing Common A Owners and     % will be held by the investors participating in this offering.

 

Voting power held by holders of Class B common stock after giving effect to this offering and the use of proceeds

    % (or 0% if all outstanding LLC Units held by the Continuing LLC Owners were exchanged (with automatic cancellation of all outstanding shares of Class B common stock) for newly issued shares of Class A common stock).

 

Use of proceeds

We estimate that the net proceeds to us from the sale of shares of our Class A common stock by us in this offering, after deducting estimated underwriting discounts and commissions, will be approximately $         (or approximately $         if the underwriters exercise in full their option to purchase additional shares of Class A common stock to cover over-allotments, if any), assuming an initial public offering price of $         per share (the midpoint of the range set forth on the cover page of this prospectus).

 

 

We intend to use all of the proceeds we receive in this offering (including from any exercise by the underwriters of their option to purchase Class A common stock to cover over-allotments, if any) to



 

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purchase a number of newly issued Class A LLC units from Exeter Finance LLC that is equivalent to the number of shares of Class A common stock that we offer and sell in this offering, as described under “Organizational Structure—This Offering.”

 

  We intend to cause Exeter Finance LLC to use such proceeds as follows:

 

   

$         (or $         if the underwriters exercise in full their option to purchase additional Class A common stock to cover over-allotments, if any) to redeem                  LLC Units from certain Continuing LLC Owners at a price per LLC Unit equal to the public offering price per share of Class A common stock in this offering, less the underwriters discount;

 

   

to pay the expenses of this offering; and

 

   

the balance for general corporate purpose.

 

  See “Use of Proceeds.”

 

  We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders.

 

Dividend policy

We currently do not anticipate paying any cash dividends on our Class A common stock in the foreseeable future. The New LLC Agreement will provide for regular periodic cash distributions, which we refer to as “tax distributions,” to be made to holders of the LLC Units, including us, if it is determined that the income of Exeter Finance LLC will give rise to net taxable income allocable to holders of the LLC Units. See “Organizational Structure—Amendment of the Limited Liability Company Agreement of Exeter Finance LLC.” To the extent that the tax distributions we receive exceed the amounts we actually require to pay taxes, because of the lower tax rate applicable to us than the assumed tax rate on which such distributions are based, and we are required to make payments under the Tax Receivable Agreement (as defined below), we anticipate that our board of directors will cause us to contribute such excess cash (net of any operating expenses) to Exeter Finance LLC. Concurrently with the contribution of such excess cash, in order to maintain the intended economic relationship between the shares of Class A common stock and the Class B LLC Units after accounting for such contribution, Exeter Finance LLC and we, as applicable, will undertake ameliorative actions, which may include reverse splits, reclassifications, combinations, subdivisions or adjustments of the then-outstanding LLC Units and corresponding shares of Class B common stock. See “Dividend Policy.”

 

Exchange Rights

Pursuant to the New LLC Agreement, the Continuing LLC Owners will have the right to exchange their LLC Units, together with an equal number of shares of our Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to



 

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customary conversion rate adjustments for stock splits, stock dividends, reclassifications and other similar transactions, or for cash (based on the market price of the shares of Class A common stock), at the option of Exeter Finance LLC (such determination to be made by the independent members of our Board of Directors acting on our behalf in our capacity as managing member of Exeter Finance LLC). See “Organizational Structure—Amendment of the Limited Liability Company Agreement of Exeter Finance LLC.

 

Tax Receivable Agreement

Future exchanges of LLC Units, together with the corresponding shares of Class B common stock, for shares of our Class A common stock or cash are expected to produce favorable tax attributes for us, as are redemptions of LLC Units from certain Continuing LLC Owners as described under “Use of Proceeds.” These tax attributes would not be available to us in the absence of those transactions. Accordingly, immediately prior to the closing of this offering, we, Exeter Finance LLC, the Continuing LLC Owners and the Continuing Common A Owners (the Continuing Common A Owners and the Continuing LLC Owners, together, the “TRA Parties”) will enter into a Tax Receivable Agreement (the “Tax Receivable Agreement”).

 

  Under the Tax Receivable Agreement, we generally will be required to pay to the TRA Parties 85% of the applicable savings, if any, in U.S. federal, state, and local income tax that we actually realize (or in some circumstances are deemed to realize) as a result of:

 

   

certain tax attributes created in the future as a result of exchanges by the Continuing LLC Owners of their LLC Units, together with the corresponding shares of Class B common stock, for shares of our Class A common stock or cash, at the election of Exeter Finance LLC;

 

   

certain tax attributes created as a result of redemptions of LLC Units from certain Continuing LLC Owners as described under “Use of Proceeds”;

 

   

our utilization of certain tax attributes of the Merging Blocker (as defined below);

 

   

tax benefits related to imputed interest arising from payments under the Tax Receivable Agreement; and

 

   

payments under the Tax Receivable Agreement.

 

  Under this agreement, we generally expect to retain the benefit of 15% of the applicable tax savings after our payment obligations above are taken into account.

 

  See “Organizational Structure” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.”

 

Registration Rights Agreement

We intend to enter into a registration rights agreement whereby, following this offering and the expiration of the related 180-day



 

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lock-up period, we may be required to register under the Securities Act the sale of shares of our Class A common stock that may be (i) issued to certain of the Continuing LLC Owners upon exchange of their LLC Units and (ii) issued to the Continuing Common A Owners in connection with the Reorganization Transactions. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

 

Listing

We intend to apply to list our Class A common stock on the NYSE under the symbol “XTF.”

 

Risk Factors

See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our Class A common stock.

Unless we specifically state otherwise, the information in this prospectus does not take into account:

 

   

                shares of Class A common stock issuable upon exercise of the underwriters’ over-allotment option;

 

   

                shares of Class A common stock reserved for issuance pursuant to equity compensation plans; and

 

   

the issuance of up to                  shares of Class A common stock issuable upon the exchange of the same number of LLC Units (together with the same number of shares of our Class B common stock) that will be held by the Continuing LLC Owners immediately following this offering.



 

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SUMMARY FINANCIAL AND OTHER DATA

The following tables set forth summary historical condensed consolidated financial and other data of Exeter Finance LLC at the dates and for the periods indicated. Exeter Finance LLC is considered our predecessor for accounting purposes, and its historical condensed consolidated financial statements will be our historical condensed consolidated financial statements following this offering.

The statements of operations data for the years ended December 31, 2017, 2016 and 2015, and balance sheet data as of December 31, 2017 and 2016, are derived from the audited consolidated financial statements of Exeter Finance LLC and related notes included elsewhere in this prospectus. The balance sheet data as of December 31, 2015 is derived from the audited consolidated financial statements of Exeter Finance LLC (which operated as Exeter Finance Corp., a Texas corporation, as of the date of such balance sheet) and related notes not included in this prospectus.

The condensed consolidated statements of operations data for the nine months ended September 30, 2018 and 2017, and balance sheet data as of September 30, 2018, are derived from Exeter Finance LLC’s unaudited condensed consolidated financial statements and related notes included elsewhere in this prospectus. The summary historical financial data of Exeter Finance Corporation has not been presented because Exeter Finance Corporation is a newly incorporated entity and has not engaged in any business or other activities except in connection with its formation and initial capitalization. Historical results included below and elsewhere in this prospectus are not necessarily indicative of our future performance, and the results for any interim period are not necessarily indicative of the operating results to be expected for the full fiscal year.

The summary unaudited pro forma condensed consolidated statement of operations data for the nine months ended September 30, 2018 and the fiscal year ended December 31, 2017, and the summary unaudited pro forma balance sheet data as of September 30, 2018 have been prepared to reflect the Reorganization Transactions and the issuance of shares of our Class A common stock offered by us in this offering and the other transactions described under “Unaudited Pro Forma Condensed Consolidated Financial Information.” Such unaudited summary pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the relevant transactions had been consummated on the date indicated, nor is it indicative of future operating results.

The following summary historical condensed consolidated financial and other data and summary unaudited pro forma financial information are qualified in their entirety by reference to, and should be read in conjunction with, our audited consolidated financial statements and related notes, and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Condensed Consolidated Financial Data,” “Unaudited Pro Forma Condensed Consolidated Financial Information” and other financial information included in this prospectus.



 

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SUMMARY FINANCIAL AND OTHER DATA

 

    Pro Forma(a)
As Adjusted
Nine Months Ended
September 30, 2018
    Nine Months Ended
September 30,
          Years Ended December 31,  
($ thousands, except share-
related amounts)
  2018     2017     Pro
Forma(a) As
Adjusted

Year Ended
December 31, 2017
    2017(b)     2016     2015  
    (unaudited)     (unaudited)     (unaudited)                    

Statements of Operations Data

             

Interest on loan receivables

  $       $ 558,190     $ 475,355     $                   $ 627,185     $ 569,765     $ 560,234  

Gain on sale of loan receivables

      13,704       —           5,343       —         —    

Fee and other income

      8,119       4,772         6,974       12,205       11,736  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest, fee and other income

      580,013       480,127         639,502       581,970       571,970  

Interest expense

      122,021       106,527         142,840       129,053       110,421  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest, fee and other income

      457,992       373,600         496,662       452,917       461,549  

Provision for credit losses

      275,338       241,594         294,253       266,700       311,315  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest, fee and other income after provision for credit losses

      182,654       132,006         202,409       186,217       150,234  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and employee benefits

      74,566       70,476         92,418       84,583       83,274  

Other operating expenses

      40,616       38,607         50,489       55,671       55,974  

Depreciation and amortization

      10,102       10,837         14,239       15,046       13,312  

Restructuring (income) expense

      (12     (62       (63     (177     6,796  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

      125,272       119,858         157,083       155,123       159,356  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

      57,382       12,148         45,326       31,094       (9,122

Provision for income taxes

      —         —           —         1,617       8,268  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

      57,382       12,148         45,326       29,477       (17,390

Net income (loss) attributable to non-controlling interests

      —         —           —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Exeter Finance

  $       $ 57,382     $ 12,148     $       $ 45,326     $ 29,477     $ (17,390
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma earnings per share:

             

Basic

  $           $          
 

 

 

       

 

 

       

Diluted

  $           $          
 

 

 

       

 

 

       

Pro forma number of shares used in computing earnings per share:

             

Basic

                              
 

 

 

       

 

 

       

Diluted

             
 

 

 

       

 

 

       

 

(a)

Pro forma as adjusted condensed consolidated statement of operations data presents condensed consolidated statement of operations data on a pro forma as adjusted basis after giving effect to the Reorganization Transactions described under “Organizational Structure.”



 

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SUMMARY FINANCIAL AND OTHER DATA (continued)

 

(b)

On April 30, 2017, Exeter Finance Corp. converted from a Texas corporation to a Delaware limited liability company and changed its name to Exeter Finance LLC. Beginning May 1, 2017, Exeter Finance LLC is treated as a flow-through entity for income tax purposes and any taxable income or loss generated by Exeter Finance LLC is passed through to and reported by its indirect equity owners.

 

     Pro
Forma(a)(b)

As
Adjusted
As of
September 30,

2018
     As of
September 30,
2018
     As of December 31,  
($ in thousands)    2017(c)      2016      2015  
     (unaudited)      (unaudited)                       

Balance Sheets Data

              

Loan receivables, net of deferred fees and costs

   $                    $ 3,806,117      $ 3,196,825      $ 2,995,354      $ 3,101,297  

Allowance for credit losses

        260,788        217,606        225,573        263,570  

Deferred tax asset

        —          —          —          34,006  

Total assets

        3,974,804        3,355,732        3,153,844        3,217,228  

Accounts payable, accrued liabilities, deferred rent

        53,683        42,904        36,990        37,006  

Warehouse facility

        354,600        282,300        310,000        392,000  

Senior notes, net

        175,000        197,455        195,914        194,431  

Securitization notes payable, net(d)

        2,995,394        2,437,208        2,262,694        2,275,021  

Payable to related parties pursuant to tax receivable agreement

        —          —          —          —    

Total liabilities

        3,578,677        2,959,867        2,805,598        2,898,458  

Total equity

        396,127        395,865        348,246        318,770  

 

(a)

Pro forma as adjusted condensed consolidated balance sheet data presents condensed consolidated balance sheet data on a pro forma as adjusted basis after giving effect to:

 

  i.

the Reorganization Transactions described under “Organizational Structure”;

 

  ii.

the creation of certain tax assets in connection with this offering and the Reorganization Transactions;

 

  iii.

the creation of related liabilities in connection with entering into the Tax Receivable Agreement with certain of our existing owners; and

 

  iv.

the sale by us of shares of Class A common stock pursuant to this offering and the application of the proceeds from this offering as described in “Use of Proceeds,” based on an assumed initial public offering price of $        per share, which is the midpoint of the range set forth on the cover page of this prospectus.

 

(b)

A $1.00 increase or decrease in the assumed initial public offering price would increase or decrease, as applicable, total assets and total equity by $        assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions. Similarly, an increase or decrease of one million shares of Class A common stock sold in this offering by us would increase or decrease, as applicable, total assets and total equity by $        based on an assumed initial public offering price of $        per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions.

(c)

On April 30, 2017, Exeter Finance Corp. converted from a Texas corporation to a Delaware limited liability company and changed its name to Exeter Finance LLC. Beginning May 1, 2017, Exeter Finance LLC is



 

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SUMMARY FINANCIAL AND OTHER DATA (continued)

 

  treated as a flow-through entity for income tax purposes and any taxable income or loss generated by Exeter Finance LLC is passed through to and reported by its indirect equity owners.
(d)

Securitization notes payable includes multiple tranches of notes issued by the consolidated VIEs that are held by third parties, including $37.4 million non-principal protected notes at September 30, 2018 and none at September 30, 2017. These notes do not obligate the Company to return a stated amount of principal at maturity, but rather represent residual interests that may receive a return based on the performance of the underlying loan receivables collateral. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Financial Measures—Exeter Owned Loans and Third Party Contributed Loans.”

 

    September 30,     December 31,  
($ thousands, rates annualized)   2018     2017     2017     2016     2015  
    (unaudited)                    

Other Information

         

Retail installment contract gross receivable originations

  $ 1,765,130     $ 1,326,045     $ 1,706,731     $ 1,258,069     $ 1,567,242  

End of period gross receivables (UPB)

    3,879,110       3,337,500       3,264,820       3,038,739       3,128,711  

End of period managed gross receivables

    3,973,820       3,337,500       3,363,501       3,038,739       3,128,711  

End of period loan receivables, carrying value

    3,806,117       3,271,348       3,196,825       2,995,354       3,101,297  

End of period delinquent principal over 60 days past due(a)

    231,125       188,537       223,833       202,424       175,072  

Charge-offs, net of recoveries

    232,157       224,353       302,220       304,697       252,728  

Average gross receivables

    3,615,030       3,207,472       3,237,218       3,070,884       3,042,055  

Average total assets

    3,725,422       3,306,563       3,332,337       3,152,530       3,157,369  

Average total debt

    3,280,530       2,918,539       2,936,395       2,800,741       2,806,027  

Average total equity

    399,311       354,958       361,868       316,324       312,338  

Ratios

         

Yield on gross receivables(b)

    20.64     19.81     19.37     18.55     18.42

Cost of debt(c)

    4.97     4.88     4.86     4.61     3.94

Net interest margin(d)

    16.13     15.37     14.96     14.35     14.79

Fee and other income(e)

    0.30     0.20     0.22     0.40     0.39

Efficiency ratio(f)

    25.92     29.18     29.07     30.93     31.64

Return on average assets(g)

    2.06     0.49     1.36     0.94     (0.55 )% 

Return on average common equity(h)

    19.21     4.58     12.53     9.32     (5.57 )% 

Tangible common equity to tangible assets(i)

    9.97     10.75     11.80     11.04     8.95

Net charge-off ratio(j)

    8.59     9.35     9.34     9.92     8.31

End of period loan receivable delinquency ratio(k)

    5.96     5.65     6.86     6.66     5.60

Allowance for credit losses as a percentage of loan receivables, carrying value(l)

    6.85     7.42     6.81     7.53     8.50

 

(a)

End of period delinquent principal over 60 days excludes those loan receivables in bankruptcy status totaling $83.0 million and $93.5 million for the nine months ended September 30, 2018 and 2017, and $82.2 million, $91.9 million and $82.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.

(b)

Yield on gross receivables is the ratio of interest income to average gross receivables.

(c)

Cost of debt is the ratio of interest expense to average total debt.

(d)

Net interest income is interest income less interest expense on our portfolio of retail installment contracts reflected on our consolidated balance sheets. Net interest margin is the ratio of net interest income to average gross receivables.

(e)

Fee and other income is the ratio of fee and other income to average gross receivables.



 

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SUMMARY FINANCIAL AND OTHER DATA (continued)

 

(f)

Efficiency ratio is the ratio of operating expenses (excluding depreciation and amortization) to net interest income, fee and other income.

(g)

Return on average assets is the ratio of net income (loss) to average total assets.

(h)

Return on average common equity is the ratio of net income (loss) to average total equity.

(i)

Tangible common equity to tangible assets is the ratio of end of period total common equity less goodwill, other intangibles and deferred tax assets to end of period total assets less goodwill, other intangibles and deferred tax assets. Our management considers this non-GAAP financial measure (as defined below) to monitor and set limits on our leverage covenants. We believe this non-GAAP financial measure provides both management and investors a more complete understanding of the underlying operational results and trends and our marketplace performance. Tangible common equity to tangible assets is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, total equity to total assets and other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). A reconciliation from GAAP to this non-GAAP measure is shown in the Tangible Common Equity table below.

(j)

Net charge-off ratio is the ratio of charge-offs, net of recoveries, to average gross loan receivables.

(k)

Delinquency ratio, end of period is the ratio of end of period delinquent principal over 60 days to end of period gross receivables.

(l)

Allowance for credit losses is the ratio of allowance for credit losses to the end of period loan receivables carrying value.

Tangible Common Equity

 

     As of September 30,     As of December 31,  
($ thousands)    2018     2017     2017     2016     2015  
     (unaudited)                    

Total common equity

   $ 396,127     $ 366,463     $ 395,865     $ 348,246     $ 318,770  

Deduct:

          

Deferred tax asset

     —         —         —         —         34,006  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity

   $ 396,127     $ 366,463     $ 395,865     $ 348,246     $ 284,764  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   $ 3,974,804     $ 3,409,497     $ 3,355,732     $ 3,153,844     $ 3,217,228  

Deduct:

          

Deferred tax asset

     —         —         —         —         34,006  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible assets

   $ 3,974,804     $ 3,409,497     $ 3,355,732     $ 3,153,844     $ 3,183,222  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total common equity to total asset ratio

     9.97     10.75     11.80     11.04     9.91

Tangible common equity to tangible assets ratio

     9.97     10.75     11.80     11.04     8.95


 

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RECENT DEVELOPMENTS

Preliminary Estimated Unaudited Financial Results for the Fiscal Year Ended December 31, 2018

The data presented below reflects our preliminary estimated unaudited financial results for the year ended December 31, 2018 based upon information available to us as of the date of this prospectus. This data is not a comprehensive statement of our financial results for the year ended December 31, 2018, and our actual results may differ materially from this preliminary estimated data. In addition, following the Reorganization Transactions, we will be subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of Exeter Finance LLC, which will result in higher income taxes. The audit of our December 31, 2018 financial statements has not been completed. During the course of the preparation of our financial statements and related notes and the completion of the audit for our December 31, 2018 financial statements, additional adjustments to the preliminary estimated financial information presented below may be identified. Any such adjustments may be material. Our independent registered public accounting firm, KPMG LLP, has not audited, reviewed, compiled or performed any procedures with respect to this preliminary financial data and, accordingly, KPMG LLP does not express an opinion or any other form of assurance with respect thereto.

Based upon such preliminary estimated financial results, we expect various key metrics for the year ended December 31, 2018 to be between the ranges in the following table, as compared to the year ended December 31, 2017 period:

 

     Year Ended December 31,  

Key Metrics

($ thousands)

   Preliminary 2018      2017  
   High      Low         

Total interest, fee and other income

                                           $ 639,502  

Net interest, fee and other income

           496,662  

Net income

           45,326  

Net income, managed basis

           45,326  

The following table sets forth a reconciliation of our GAAP net income to net income, managed basis for the periods indicated. We define net income, managed basis, as GAAP net income less income and expenses derived from loans owned by third parties and contributed to our securitization trusts. We include contractual servicing fee revenue for those retail installment contracts owned and contributed by third parties that are serviced by the Company in net income, managed basis. The activity related to our third party contributed loans is the result of the two-year forward flow loan sale agreement entered into in March 2018. Thus, the GAAP to non-GAAP reconciliation includes add backs to derive the net income, managed basis for the preliminary year ended December 31, 2018 period, whereas the add backs are zero for the year ended December 31, 2017. However, year ended December 31, 2017 metrics are included for comparative purposes within the table below.

Our management considers this non-GAAP financial measure essential to monitoring and managing the financial performance of our owned and managed retail installment contract portfolio. We believe this non-GAAP financial measure provides both management and investors a more complete understanding of the underlying operational results and trends and our marketplace performance. Net income, managed basis is a non-GAAP measure and should be considered in addition to, but not as a substitute for or superior to, other measures of financial performance prepared in accordance with GAAP. A reconciliation from GAAP to this non-GAAP measure is shown in the table below.



 

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RECENT DEVELOPMENTS (continued)

 

See “Non-GAAP Financial Measures” for additional details.

 

     Year Ended December 31,  

Net income, managed basis

($ thousands)

   Preliminary 2018      2017  
   High      Low         

Consolidated Statement of Operations:

                                          

Net income, GAAP basis

         $ 45,326  

Add (deduct):

        

Interest, fee and other income earned on third party contributed loans

           —    

Servicing fee revenue from third party contributed loans(a)

           —    

Interest expense attributable to third party contributed loans

           —    

Provision for loan losses attributable to third party contributed loans

           —    
  

 

 

    

 

 

    

 

 

 

Net income, managed basis

   $ —        $ —        $ 45,326  
  

 

 

    

 

 

    

 

 

 

Other information:

        

Average gross receivables, managed basis(b)

         $ 3,237,218  

Average total assets, managed basis(c)

         $ 3,332,337  

Average total debt, managed basis(d)

         $ 2,936,395  

Average total equity, managed basis(e)

           361,868  

 

(a)

Represents the servicing fee revenue from third party contributed loans included in interest, fee and other income.

(b)

Average gross receivables, managed basis is average gross receivables excluding average gross receivables contributed by third party of $         million for the preliminary year ended December 31, 2018.

(c)

Average total assets, managed basis is average total assets excluding average total assets contributed by third party of $             million for the preliminary year ended December 31, 2018.

(d)

Average total debt, managed basis is average total debt excluding average total debt attributed to assets contributed by third party of $         million for the preliminary year ended December 31, 2018.

(e)

Average total equity, managed basis is average total equity excluding third party contributor activity, which would have reduced average total equity by $         million for the preliminary year ended December 31, 2018.



 

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RECENT DEVELOPMENTS (continued)

 

The following table sets forth certain preliminary estimated other metrics for the year ended December 31, 2018 compared to the year ended December 31, 2017:

 

     Year Ended December 31,  
     Preliminary 2018      2017  
($ thousands, rates annualized)    High      Low         

Other Information

                                          

Retail installment contract gross receivable originations

         $ 1,706,731  

End of period gross receivables (UPB)

           3,264,820  

End of period managed gross receivables

           3,363,501  

End of period delinquent principal over 60 days past due(a)

           223,833  

Charge-offs, net of recoveries

           302,220  

Average gross receivables

           3,237,218  

Average total assets

           3,332,337  

Average total debt

           2,936,395  

Average total equity

           361,868  

 

(a)

End of period delinquent principal over 60 days excludes those loan receivables in bankruptcy status totaling $ million and $82.2 million for the years ended December 31, 2018 and 2017, respectively.



 

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RISK FACTORS

The following section discusses material risks and uncertainties that could adversely affect our business, financial condition, results of operations, cash flows, strategies and/or prospects. Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as all of the other information contained in this prospectus including Exeter Finance LLC’s consolidated financial statements, and the related notes thereto, before deciding to invest in our Class A common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, results of operations and cash flow. In such case, the trading price of our Class A common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business

We need substantial liquidity to operate our business.

We have historically funded our operations principally through internally generated cash flows and incurrence of debt, including through securitizations, our warehouse credit facility, loan sales and borrowings under our senior note. However, we may not be able to obtain sufficient funding for our future operations from such sources on favorable terms or at all. Our warehouse facility matures in June 2021 and there can be no assurance that we will be able to renew or extend it with the current lenders or other lenders on favorable terms or at all. In addition, the purchasers in our loan sales are not obligated in certain circumstances to purchase future loans from us on terms similar to the terms which they purchased loans in the past, or at all.

We require a substantial amount of cash liquidity to operate our business. Among other things, we use such cash liquidity to:

 

   

originate and acquire retail installment contracts;

 

   

fund overcollateralization in our warehouse credit facility and securitizations;

 

   

pay securitization fees and expenses;

 

   

fund reserve accounts or other credit enhancements in connection with securitizations;

 

   

satisfy working capital requirements and pay operating expenses;

 

   

pay taxes, tax distributions and obligations under the Tax Receivable Agreement that we will enter into with certain of our stockholders immediately prior to this offering; and

 

   

pay interest expense.

If we are unable to fund our operations on favorable terms or at all, our business, results of operations and financial condition could be adversely affected.

We depend on our ability to securitize our portfolio of retail installment contracts to provide permanent financing for these contracts.

We depend upon our ability to obtain permanent financing for pools of retail installment contracts by conducting term securitization transactions. In this context, “permanent financing” means financing that extends to cover the full term during which the underlying retail installment contracts are outstanding and requires repayment as the underlying retail installment contracts are repaid or charged off. By contrast, our warehouse credit facility permits us to borrow against the value of such receivables only for limited periods of time. We typically repay advances under our warehouse credit facility with the proceeds of securitizations. There can be no assurance that any securitization transaction will be available on terms acceptable to us, or at all. In the past, disruptions in the market for asset-backed securities resulted in less favorable terms on our asset-backed securities than previous terms. The timing of any securitization transaction is affected by a number of factors

 

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beyond our control, any of which could cause substantial delays, including, without limitation, market conditions, the approval by all parties of the terms of the securitization and our ability to acquire a sufficient number of retail installment contracts for securitization. Because our focus is on non-prime consumers who have historically been, and may in the future be, more likely to be affected, or more severely affected, by adverse macroeconomic conditions, market conditions affecting our ability to securitize our portfolio of retail installment contracts may be more pronounced than if we focused on prime consumers.

Further, other matters, such as (i) accounting standards applicable to securitization transactions and (ii) capital and leverage requirements applicable to banks and other regulated financial institutions holding asset-backed securities, could result in decreased investor demand for securities issued through our securitization transactions, or increased competition from other institutions that undertake securitization transactions. In addition, compliance with certain laws and regulations, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and the Investment Company Act of 1940 and regulations promulgated pursuant thereto, as well as the impact of any regulatory investigations or enforcement activities, may affect the type of securitizations that we are able to complete.

If it is not possible or economical for us to securitize our retail installment contracts in the future, we would need to seek alternative financing to support our operations and to meet our existing debt obligations, which may be less efficient and more expensive than raising capital via securitizations and could have a material adverse effect on our business, results of operations and financial condition.

Our profitability and financial condition could be materially adversely affected if the value of used cars declines resulting in lower recoveries in sales of repossessed vehicles.

General economic conditions, the supply of off-lease and other used vehicles to be sold, new vehicle market prices and marketing programs, vehicle brand image and strength, perceived vehicle quality, general consumer preference and confidence levels, overall price, and volatility of energy prices, among other factors, influence used vehicle prices and thus the amount we can recover as a result of the remarketing of repossessed vehicles that serve as collateral for underlying retail installment contracts. As a result, declines in used vehicle prices could have a negative impact on our profitability and financial condition.

We depend on cash flows from our residual interests in our securitization program and our warehouse credit facility.

When we finance our retail installment contracts through securitizations and our warehouse credit facility, we receive cash and retain a residual interest in the assets financed. Those financed assets are owned by the special-purpose subsidiary that is formed for the related securitization. This residual interest represents the right to receive the future cash flows to be generated by the retail installment contracts in excess of (i) the interest and principal paid to investors or lenders on the indebtedness issued in connection with the financing, (ii) the costs of servicing the retail installment contracts, (iii) net charge offs as a result of credit losses and (iv) certain other costs incurred in connection with completing and maintaining the securitization or warehouse credit facility. We sometimes refer to these future cash flows as “excess spread.”

Under the financial structures we have used to date in our securitizations and warehouse credit facility, excess spread that would otherwise be paid to the holder of the residual interest are first used to increase overcollateralization or are retained in a reserve account within the securitization trusts or the warehouse facility to provide liquidity and credit enhancement for the related securities.

While the specific terms and mechanics vary among transactions, our securitization and warehouse facility agreements generally provide that we will receive excess spread only if the amount of overcollateralization and reserve account balances have reached specified levels and the delinquency or net losses related to the retail

 

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installment contracts in the retail installment contract pools are below certain predetermined levels. In the event delinquencies or net losses on retail installment contracts exceed these levels, the terms of the securitization and the warehouse facility:

 

   

may require increased credit enhancement in the form of overcollateralization; and

 

   

in certain circumstances, may permit affected parties to require the transfer of servicing on some or all of the securitized or warehoused contracts from us to an unaffiliated servicer.

We typically retain residual interests. In any case, the future excess spread cash flow received in respect of the residual interests is integral to the financing of our operations. The amount of cash received from residual interests depends in large part on how well our portfolio of securitized and warehoused retail installment contracts performs. If our portfolio of securitized and warehoused retail installment contracts has higher delinquency and loss ratios than expected, then the amount of money realized from our retained residual interests, or the amount of money we could obtain from the sale or other financing of our residual interests, would be reduced, which could have a material adverse effect on our business, results of operations and financial condition.

If a significant number of our retail installment contracts experience defaults, our results of operations and liquidity may be impaired.

We specialize in the purchase and servicing of retail installment contracts to finance automobile purchases by non-prime consumers. Such retail installment contracts entail a higher risk of non-performance, higher delinquencies and higher losses than retail installment contracts with more creditworthy customers. Furthermore, delinquency and/or charge-off rates may increase in the future as our portfolio grows and matures and are likely to increase if economic conditions deteriorate. While we believe that our pricing of the retail installment contracts, the underwriting criteria and collection methods we employ enable us to negate, to a degree, the higher risks inherent in retail installment contracts with non-prime consumers, no assurance can be given that such pricing, criteria and methods will afford adequate protection against such risks or that such methods will enable us to avoid higher than expected charge-off rates or that our allowance for credit losses for the next twelve months will be sufficient to cover actual losses.

If retail installment contracts that we purchase and hold experience defaults to a greater extent than we have anticipated, this could materially and adversely affect our business, results of operations and financial condition. A portion of the retail installment contracts that we acquire will default or prepay. In the event of payment default, the collateral value of the vehicle securing the retail installment contract realized by us in a repossession will generally not cover the outstanding principal balance on that automobile contract and the related costs of recovery. Furthermore, we may suffer a loss upon theft or physical damage of any financed vehicle if the consumer fails to maintain insurance as required by the retail installment contract and is unable to pay for repairs to or replacement of the vehicle. We maintain an allowance for credit losses on retail installment contracts held on our balance sheet, which reflects our estimates of probable credit losses for the next twelve months that can be reasonably estimated. If the allowance is inadequate, then we would recognize the losses in excess of the allowance as an expense and our results of operations could be adversely affected. In addition, under the terms of our warehouse facility, we are not able to borrow against defaulted retail installment contracts, including retail installment contracts that are, at the time of default, funded under our warehouse facility, which will reduce the overcollateralization of the warehouse facility and possibly reduce our liquidity and the amount of cash flows available to us.

Our consolidated results of operations and financial condition and our consumers’ ability to make payments on their retail installment contracts have been, and may in the future be, adversely affected by economic conditions and other factors that we cannot control.

Uncertainty and negative trends in general economic conditions in the United States and abroad historically have created a difficult operating environment for our business and other companies in our industry. Our

 

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business is directly related to sales of new and used automobiles, which are sensitive to employment rates, energy prices, car pricing changes, including price changes that may result from tariffs, prevailing interest rates and other domestic economic conditions. During periods of economic slowdown, such as the economic downturn in 2007 and the years that followed, delinquencies, defaults, repossessions and losses generally increase and the demand for asset-backed securities (“ABS”) typically decreases limiting our access to capital and financing. These periods may also be accompanied by increased unemployment rates, decreased consumer demand for automobiles, aging vehicles and declining values of automobiles securing outstanding retail installment contracts, which weaken collateral coverage and increase the amount of loss in the event of default. Additionally, higher or unstable energy prices, unstable real estate values, increase in consumer indebtedness, general availability of consumer credit and other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values on certain types of automobiles. Further, our access to capital, including our ability to securitize our retail installment contracts, could be negatively affected during an economic slowdown.

Because our focus is on consumers with non-prime FICO® Scores, the actual rates of delinquencies, defaults, repossessions and losses on our retail installment contracts could be more dramatically affected by an economic downturn. Non-prime consumers generally have lower collection rates and higher loan loss rates than prime consumers. Non-prime consumers have historically been, and may in the future become, more likely to be affected, or more severely affected, by adverse macroeconomic conditions, particularly unemployment. If our consumers default, we will bear this risk, to the extent of any deficiency between the value of the collateral and the balance owed on the retail installment contract, including accrued and unpaid interest, or the full amount in certain cases where the collateral does not get repossessed. Accordingly, consumer defaults could adversely affect our results from operations. In addition, during an economic slowdown, our servicing costs may increase without a corresponding increase in our financing income. If aspects of our business, including the quality of our retail installment contracts portfolio, are significantly affected by economic changes or any other conditions in the future, we cannot be certain that our policies and procedures for underwriting, processing and servicing retail installment contracts will adequately protect us in the event of such changes. Technological advancements or changes to trends in the automobile industry such as new autonomous driving technologies or car- and ride-sharing programs could decrease consumer demand for automobiles. Decreased consumer demand for automobiles could negatively impact demand for our financing programs as well as weaken collateral values of automobiles. If we fail to adapt to changing economic conditions or other factors, or if such changes affect our consumers’ willingness or capacity to repay their retail installment contracts, it could have a material adverse effect on our business, results of operations and financial condition.

Furthermore, our business is significantly affected by U.S. federal and state governments and their respective agencies, as well as the monetary policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control and could have a material adverse effect on us through interest rate changes, costs of compliance with increased regulation and other factors. See “Our Business—Regulation and Supervision.” If we experience an economic downturn or if we become affected by other events beyond our control, we may experience a significant reduction in revenues, earnings and cash flows and difficulties accessing capital, which could have a material adverse effect on our business, results of operations and financial condition.

Our allowance for credit losses and impairments may prove to be insufficient to absorb losses inherent in our retail installment contracts portfolio.

We maintain an allowance for credit losses for the next twelve months, established through a provision for credit losses charged to expense, that we believe is appropriate to provide for probable losses inherent in our retail installment contract portfolio during the next twelve months. Probable losses are estimated based on various factors, including expected defaults and severity rates, taking into account the specific credit characteristics of the portfolio. Additionally, the loss estimates are impacted by our estimate of the value of the

 

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underlying collateral, trends in projected used car values and macroeconomic trends, including unemployment rates and energy prices. If consumer behavior changes as a result of economic conditions and/or if we are unable to predict how unemployment rates, the fluctuation of energy prices, and general economic uncertainty may affect our allowance for credit losses, our provision may be inadequate.

The process for determining our allowance for credit losses for the next twelve months is complex, and we may from time to time make changes to our process for determining our allowance for credit losses. Changes that we make to enhance our process for determining our allowance for credit losses may lead to an increase in our allowance for credit losses. Any increase in our allowance for credit losses for the next twelve months will result in a decrease in net income and capital, and may have a material adverse effect on us. Material changes to our methodology for determining our allowance for credit losses could result in the need to restate our financial statements, pay fines, penalties, subject us to potential regulatory action, limit our access to capital or damage to our reputation.

Changes in economic conditions affecting consumers, new information regarding our retail installment contracts, and other factors, both within and outside of our control, may require an increase in the allowance for credit losses for the next twelve months. Furthermore, growth in our retail installment contract portfolio generally would lead to an increase in the provision for credit losses. In addition, if net charge-offs in future periods are greater than expected, we will need to increase the allowance. There is no precisely accurate method for predicting credit losses, and we cannot provide assurance that our current or future credit loss allowance will be sufficient to cover actual losses during the period for which such allowance has been made.

If we default in our servicing obligations, a servicer termination event could occur with respect to the relevant asset-backed securities, and we could be replaced as servicer.

We currently act as servicer with respect to our securitization trusts, warehouse facility and the retail installment contracts sold under our funds flow agreement. If we default in our servicing obligations, a servicer termination event could occur with respect to the relevant asset-backed securities, and we could be replaced as servicer which would reduce our servicing fees and could adversely affect our business, financial condition and results of operations, which could be materially and adversely affected if we were to be terminated as servicer with respect to a material portion of our managed portfolio. Servicer defaults include, for example, the failure of the servicer to make any payment, transfer or deposit in accordance with the securitization documents, a breach of representations, warranties or agreements made by the servicer under the securitization documents, the delegation of the servicer’s duties contrary to the securitization documents and the occurrence of certain insolvency events with respect to the servicer. Such a servicer termination event could have materially adverse consequences on our liquidity, cost of funds and ability to access the capital and securitization markets in the future.

If an increase in interest rates results in a decrease in our cash flows from excess spread, our results of operations may be impaired.

Our profitability is largely determined by the difference, or “spread,” between the effective interest rate we receive on the retail installment contracts that we acquire and the interest rates payable under our warehouse facility, on the asset-backed securities issued in our securitizations and on the unsecured senior note. In the past, disruptions in the market for asset-backed securities resulted in an increase in the interest rates we paid on asset-backed securities and/or less favorable terms generally. Should similar disruptions take place in the future, we may pay higher interest rates on asset-backed securities issued in the future and/or be required to accept other less favorable terms. Although we seek to partially offset increases in our cost of funds by increasing fees we charge to dealers when purchasing retail installment contracts, or by requiring higher interest rates on retail installment contracts we purchase, there is no assurance that we will be successful in doing so or that such actions will materially offset increases in interest we pay to finance our owned portfolio. As a result, an increase in prevailing interest rates could cause us to receive less excess spread cash flows on retail installment contracts, and thus could adversely affect our earnings and cash flows.

 

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A declining interest rate environment increases our exposure to prepayment risk in our portfolio. Increased prepayments, refinancing or other factors that impact retail installment contract balances could reduce expected revenue associated with our portfolio, which could have a negative impact on our financial results. Although the Federal Reserve’s recent decisions to raise short-term interest rates may reduce prepayment risk, debt service requirements for some of our consumers will increase, which may adversely affect those consumers’ ability to pay as contractually obligated. This could result in additional delinquencies or charge-offs and negatively impact our results of operations.

If we are unable to compete successfully with our competitors, our results of operations may be impaired.

The non-prime automobile financing business is highly competitive. We compete with a number of national, regional and local finance companies. In addition, competitors or potential competitors, including competitors that have abandoned but may re-enter the market, include other types of financial services companies, such as commercial banks, credit unions and captive finance companies affiliated with major automobile manufacturers. Many of our larger competitors and potential competitors possess greater access to capital markets for unsecured commercial paper and investment grade rated debt instruments, and to other funding sources which may be unavailable to us. Moreover, our future profitability will be directly related to the availability and cost of our capital relative to that of our competitors. Many of these companies also have long-standing relationships with automobile dealers and OEMs and may provide other financing to dealers, including floor plan financing for the dealers’ purchases of automobiles from manufacturers, which we do not offer. Further, many of our competitors often provide financing on terms more favorable to automobile purchasers or dealers than we offer. Increasing competition could also require us to lower the rates we charge on retail installment contracts in order to maintain volume. In addition, our competitors may offer pricing that is not profitable in order to increase market share. There can be no assurance that we will be able to continue to compete successfully and, as a result, we may not be able to purchase retail installment contracts from dealers at a price acceptable to us, which could result in reductions in our revenues or the cash flows available to us. Increased competition or our failure to compete effectively in an already competitive automobile financing market could have a material adverse effect on our business, results of operations and financial condition.

Our competitors may also develop and market new technologies that render our existing or future business model, products and services less competitive, unmarketable or obsolete. For example, car rideshare services, such as Uber and Lyft, are becoming increasingly popular as a means of transportation and may decrease consumer demand for used cars, particularly as urbanization increases. Furthermore, new technologies such as autonomous driving software have the potential to change the dynamics of car ownership in the future. In addition, if our competitors develop business models, products or services with similar or superior functionality to our solutions, it may adversely impact our business.

Loss of our key management or other personnel, or an inability to attract such management and other personnel, could materially and adversely affect our business, financial condition and results of operations.

The successful implementation of our growth strategy depends in part on our ability to retain our experienced management team and key employees, attract appropriately qualified personnel and have an effective succession planning framework in place. Management turnover, including the loss of any key member of our management team or other key employees, could hinder or delay our ability to implement our growth strategy effectively. Further, if we are unable to attract appropriately qualified personnel as we expand, we may not be successful in implementing our growth strategy. In either instance, our business, financial condition and results of operations could be adversely affected. The extent of our management team changes could result in disruption in our operations, negatively impact customer relationships and make recruiting for future management positions more difficult.

 

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Poor portfolio performance may trigger credit enhancement provisions in our warehouse facility or securitizations.

Our warehouse facility has portfolio net loss and delinquency ratio levels, and other performance-based metrics that, if exceeded, would increase the level of credit enhancement requirements under the warehouse facility and redirect all excess cash to the lenders until the required credit enhancement level is achieved.

The documents that govern our securitizations also contain cumulative net loss ratio limits on the receivables included in each securitization trust. If, at any measurement date, a cumulative net loss level with respect to any securitization trust were to exceed the specified trigger limits, provisions of the securitization trust would increase the level of credit enhancement requirements for that securitization trust and redirect all excess cash to the holders of the ABS until the required credit enhancement level is achieved. During this period, excess cash flow, if any, from the securitization would be used to fund the increased credit enhancement levels rather than being distributed to us. Once an impacted trust reaches the new credit enhancement requirement, we would return to receiving a residual distribution from the trust.

Negative changes in the business of the OEMs with which we seek strategic relationships or of our other strategic partners, including the OEMs, could materially and adversely affect our business, financial condition and results of operations.

A significant adverse change in the business of the OEMs with which we seek strategic relationships, including (i) significant adverse changes in its respective liquidity position and access to the capital markets, (ii) the production or sale of its vehicles (including the effects of any product recalls), (iii) the quality or resale value of its vehicles, (iv) the use of marketing incentives, (v) its relationships with key suppliers, or (vi) its respective relationships with the United Auto Workers and other labor unions, and other factors impacting OEMs or their employees could materially and adversely affect our business, financial condition and results of operations.

In the future, it is possible that the vehicle manufacturers with whom we have relationships could utilize other companies to support their financing needs, including offering products or terms that we would not or could not offer, which could materially and adversely affect our business, financial condition and results of operations. Furthermore, these vehicle manufacturers could expand, establish or acquire captive finance companies to support their financing need; thus, reducing their need for our services.

There can be no assurance that the global vehicle market or an OEM partners’ share of that market, will not suffer downturns in the future, and any negative impact could in turn materially and adversely affect our business, financial condition and results of operations.

Similarly, a significant adverse change in the business of one of our strategic partnerships, including the Independent Dealer Group with which we have a strategic partnership, could materially and adversely affect our business, financial condition and results of operations.

We may not be able to make technological improvements as quickly as some of our competitors, which could harm our ability to compete with our competitors and adversely affect our results of operations, financial condition and liquidity.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial and lending institutions to better serve customers and reduce costs. Our future success and, in particular, the success of our centralized operations, will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. We rely on our own as well as third-

 

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party proprietary software and commercial systems to continuously adapt our products and services to evolving consumer behavior, changing vehicle finance and consumer retail installment contract products and third party purchaser requirements. We employ developers, project managers, architects, business systems analysts and technical specialists to ensure that our technology and digital capabilities remain competitive. However, due to the continued rapid changes in technology, and potential for digital market disruptors to augment consumer digital behaviors, there can be no assurance that the technology solutions that we adopt will continue to be adequate for our business or provide a competitive advantage. Additionally, we may not be able to effectively implement new technology-driven products and services as quickly as some of our competitors or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could harm our ability to compete with our competitors and adversely affect our results of operations, financial condition and liquidity.

If our dealers do not submit a sufficient number of suitable retail installment contracts to us for purchase, our results of operations may be impaired.

We are dependent upon establishing and maintaining relationships with a large number of unaffiliated automobile dealers to supply us with retail installment contracts. In particular, we depend in large part upon our ability to establish and maintain relationships with reputable vehicle dealers that originate retail installment contracts at the point-of-sale, which we subsequently purchase. The agreements we have with dealers to purchase retail installment contracts do not require dealers to submit a minimum number of contracts for purchase. Additionally, none of our relationships with dealers is exclusive and any may be terminated at any time. In addition, an economic downturn or contraction of credit affecting either dealers or their customers could result in an increase in vehicle dealership closures or a decrease in the sales and retail installment contract volume of our existing vehicle dealer base. The failure of dealers to submit retail installment contracts that meet our underwriting criteria could result in reductions in our revenues or the cash flows available to us, and, therefore, could have an adverse effect on our results of operations.

Our risk management processes and procedures may not be effective in mitigating our risks.

We continue to establish and enhance processes and procedures intended to identify, measure, monitor and control the types of risk to which we are subject, including, but not limited to, credit risk, market risk, strategic risk, liquidity risk and operational risk. Credit risk is the risk of loss that arises when a consumer fails to meet the terms of a retail installment contract. Market risk is the risk of loss due to changes in external market factors such as interest rates. Strategic risk is the risk from changes in the business environment, improper implementation of decisions or inadequate responsiveness to changes in the business environment. Liquidity risk is the risk that a company’s financial condition or overall safety and soundness are adversely affected by an inability, or perceived inability, to meet funding obligations and support business growth. Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (for example, natural disasters) or compliance, reputational or legal matters and includes those risks as they relate directly to our company as well as to third parties with whom we contract or otherwise do business.

We seek to monitor and control our risk exposure through a framework that includes our risk appetite, enterprise risk assessment process, risk policies, procedures and controls, reporting requirements, credit risk culture and governance structure. Our framework, however, may not always effectively identify and control our risks. In addition, there may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated, including when processes are changed or new products and services are introduced. If our risk management framework does not effectively identify and control our risks, both those we are aware of and those we do not anticipate, including as a result of changes in economic conditions, we could suffer unexpected losses or be adversely affected, and that could have a material adverse effect on our business, results of operations and financial condition.

 

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We are required to make significant estimates and assumptions in the preparation of our financial statements, and our estimates and assumptions may not be accurate. We also rely on pricing, accounting, risk management and other models which may fail to accurately predict outcomes.

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods. Critical estimates are made by management in determining, among other things, the allowance for credit losses for the next twelve months, amounts of impairment, and valuation of income taxes. The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our consumers to repay their retail installment contracts. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the quality of our assets. If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially and adversely affected. Furthermore, the Financial Accounting Standards Board, the SEC or other regulatory bodies may change the financial accounting and reporting standards to which we are subject, including those related to assumptions and estimates we use to prepare our financial statements. These changes may occur in ways we cannot predict and may impact our financial statements.

We use models in various aspects of our business, including for liquidity and capital planning, customer selection, pricing our extensions of credit, accounting determinations, risk management and other purposes and to assist with certain business decisions, and these models rely on many estimates and assumptions. The estimates and assumptions embedded in our models may prove to be inaccurate and furthermore our models may include deficiencies such as errors in coding or formulas, incorrect input or gathering of data, insufficient control over model changes and use of models other than for their intended purposes. If our models fail to accurately predict outcomes, we may not make appropriate business or financial decisions which could materially and adversely affect our financial condition and results of operations, including our capitalization and our relationships with regulators, customers and counterparties.

The geographic distribution of our retail installment contract portfolio may increase the risk of delinquencies and charge-offs on our retail installment contracts.

We have the greatest concentration of retail installment sales contracts outstanding in Texas, California, Georgia, Florida and Illinois, which together accounted for 44.7% of our retail installment contract portfolio as of September 30, 2018; borrowers in Texas, Georgia, California, Florida and Illinois represented 12.3%, 9.9%, 9.8%, 7.1% and 5.6%, respectively, of such portfolio. Any geographic concentration may expose us to an increased risk of loss if that geographic region experiences high unemployment rates, natural disasters or weak economic conditions. Certain regions of the United States from time to time will experience weaker economic conditions and higher unemployment, and, consequently, retail installment contracts originated in such regions will experience higher rates of delinquency and loss than on similar retail installment contracts nationally.

In addition, natural disasters in specific geographic regions may result in higher rates of delinquency and loss in those areas. Such geographic regions may be particularly susceptible to natural disasters: earthquakes in the case of California, and hurricanes and flooding in the cases of Texas and Florida. Natural disasters, in those states or others, could cause a material number of our vehicle purchasers to lose their jobs, or could damage or destroy vehicles that secure our retail installment contracts. In either case, such events could result in our receiving reduced collections on our retail installment contracts, and could thus result in reductions in our revenues or the cash flows available to us.

 

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We expect that the implementation of a new accounting standard will require us to increase our allowance for credit losses and may have a material adverse effect on our financial condition and results of operations.

In June of 2016, the Financial Accounting Standards Board issued Accounting Standard Update ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU significantly changes the way that entities will be required to measure credit losses. The new standard requires that the estimated credit loss be based upon an “expected credit loss” approach rather than the “incurred loss” approach currently required. This ASU will become effective for our fiscal years beginning January 1, 2020. Early adoption is permitted for fiscal years beginning January 1, 2019. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable forecasts of collectability. This will change the current method of providing allowances for credit losses for next twelve months that are probable, which we expect will require us to increase our allowance for credit losses for the next twelve months, and will likely increase the data we would need to collect and review to determine the appropriate level of the allowance for credit losses. Any increase in our allowance for credit losses or expenses incurred to determine the appropriate level of the allowance for credit losses may have a material adverse effect on our financial condition and results of operations. See Note 1 of the Notes to the Consolidated Financial Statements included in this prospectus for more information on this new accounting standard.

Our indebtedness is significant, which could affect our ability to meet our obligations under our debt instruments and could materially and adversely affect our business and ability to react to changes in the economy or our industry.

We currently have a significant amount of indebtedness. As of September 30, 2018, we had $3.5 billion in principal amount of indebtedness outstanding (including $354.6 million under our warehouse facility, $3.0 billion under our securitization programs and $175.0 million principal amount of our senior notes). Interest expense on our indebtedness was $122.0 million and $106.5 million for the nine months ended September 30, 2018 and 2017, respectively. Although our total borrowings are restricted by covenants in our indebtedness and market conditions, we may change our target borrowing levels at any time. Incurring substantial debt subjects us to the risk that our cash flow from operations may be insufficient to service our outstanding debt. There can be no assurance that we will be able to repay or refinance our debt in the future.

Our ability to generate cash depends on many factors, including our successful financial and operating performance. Our financial and operational performance depends upon a number of factors, many of which are beyond our control.

If our financial or operational performance does not meet our expectations, we may not be able to generate sufficient cash flow from operations or obtain sufficient funding to satisfy all of our obligations, which may result in us being unable to pay our debts timely or as agreed. If we were unable to pay our debts, we would be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional equity capital. These alternative strategies might not be feasible at the time, might prove inadequate, or could require the prior consent of our lenders. If executed, these strategies could reduce the earnings available to our stockholders.

The amount of indebtedness could have important additional consequences, including the following:

 

   

it may require us to dedicate a significant portion of our cash flow from operations to the payment of the principal of, and interest on, our indebtedness, which reduces the funds available for other purposes, including retail installment contract originations;

 

   

in certain circumstances our indebtedness may limit our use of cash in a manner that reduces our operating flexibility;

 

   

it could limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing regulatory, business and economic conditions;

 

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it may limit our ability to incur additional borrowings or securitizations for working capital, capital expenditures, business development, debt service requirements, Tax Receivable Agreement payments, acquisitions or general corporate or other purposes, or to refinance our indebtedness;

 

   

it may place us at a competitive disadvantage compared to other, less leveraged competitors;

 

   

it may cause a downgrade of our debt and long-term corporate ratings if and after those ratings are obtained; and

 

   

it may increase our cost of borrowing.

The occurrence of any of these consequences could have a material adverse effect on our business, results of operations and financial condition.

Rating agencies may have an adverse impact on our securitizations.

Rating agencies may affect our ability to execute a securitization transaction, or increase the costs we expect to incur from executing securitization transactions, not only by deciding not to issue ratings for our securitization transactions, but also by altering the criteria and process they follow in issuing ratings. Rating agencies could alter their ratings processes or criteria after we have accumulated retail installment contracts for securitization in a manner that effectively reduces the value of those retail installment contracts by increasing our financing costs or otherwise requiring that we incur additional costs to comply with those processes and criteria. In addition, the rating agencies can downgrade the initial rating provided for accumulated retail installment contracts which may cause the terms of a contemplated securitization to be less favorable and may cause us to incur additional financing costs. We have no ability to control or predict what actions the rating agencies may take.

Our indebtedness and other obligations impose restrictions on our business.

Our debt reduces operational flexibility and creates default risks. Our warehouse facility contains a borrowing base or advance rate formula which requires us to pledge an amount of retail installment contracts in excess of the amounts which we can borrow under the facility. We pledge most of our assets to our warehouse facility and securitization trusts. We are also required to hold certain funds in restricted cash accounts to provide additional collateral for borrowings under our securitization trusts. In addition, our warehouse facility requires the replacement of delinquent or defaulted collateral to support the amount of outstanding debt, and the retail installment contracts pledged as collateral in securitizations must meet certain delinquency criteria at the time the securitization is issued. Accordingly, increases in delinquencies or net losses would require us to pledge additional retail installment contracts to support the same borrowing levels. In addition, securitization transactions contain provisions that require us to repurchase retail installment contracts if our representations and warranties concerning retail installment contracts quality, originations, underwriting and servicing techniques and circumstances are inaccurate or not complied with. These outcomes could adversely impact our financial condition, liquidity and results of operations.

Additionally, our warehouse facility generally contains various covenants requiring minimum financial ratios, asset quality, and portfolio performance ratios (portfolio net loss and delinquency ratios), as well as limits on extension levels. Covenants in our debt also limit our ability to:

 

   

incur or guarantee additional indebtedness;

 

   

purchase large retail installment contract portfolios in bulk;

 

   

pay dividends or make distributions on our capital stock or make certain other restricted payments;

 

   

sell assets, including our retail installment contract portfolio;

 

   

enter into transactions without affiliates;

 

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create or incur liens; and

 

   

consolidate, merge, sell, or otherwise dispose of all or substantially all of our assets.

Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs under these agreements, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interests against collateral pledged under these agreements, restrict our ability to obtain additional borrowings under these agreements and/or remove us as servicer. Any of these outcomes could have a material adverse effect on our business, results of operations and financial condition.

If our debt service obligations increase, whether due to the increased cost of existing indebtedness or the incurrence of additional indebtedness, we may be required to dedicate a significant portion of our cash flow from operations to the payment of principal of, and interest on, our indebtedness, which would reduce the funds available for other purposes. Our indebtedness also could limit our ability to withstand competitive pressures and reduce our flexibility in responding to changing business and economic conditions.

Our business could be negatively impacted by security threats, including cyber-security threats and other disruptions.

Our technology platforms, underlying infrastructure and infrastructure of integrated third party services are important to our operating activities, and any security incidents or outages could disrupt our ability to process retail installment contract applications, originate retail installment contracts or service our existing retail installment contract portfolios, which could materially and adversely affect our operating activities. Security incidents or outages may be caused by unforeseen catastrophic events, including natural disasters, terrorist or hacking attacks, large-scale power outages, software or hardware defects, computer viruses, cyber-attacks, external or internal security breaches, acts of vandalism, misplaced or lost data, programming or human errors, or other similar events. Although we maintain, and regularly assess the adequacy of, a business continuity, disaster recovery and incident response plan, to effectively manage the effects of unforeseen events, we cannot be certain that our plans will function as intended, or otherwise resolve or compensate for such effects.

We hold in our systems confidential financial and other personal data with respect to our customers and may, subject to applicable law, share that information with our third party service providers. Such information may be of value to identity thieves and others if revealed. Although we endeavor to protect the security of our computer systems and the confidentiality of the information entrusted to us, there can be no assurance that our security measures will provide adequate security.

It is possible that we may not be able to anticipate, detect or recognize threats to our systems or to those of third parties handling data on our behalf, or to implement effective preventive measures against all security incidents, especially because the techniques used change frequently or are not recognized until launched, and because cyber attacks can originate from a wide variety of sources, including third parties outside of the organization such as persons who are associated with external service providers or who are or may be involved in organized crime or linked to terrorist organizations. Such persons may also attempt to fraudulently induce employees or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers. These risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our use of web-based products and applications.

A successful penetration of the security of our systems could cause serious negative consequences, including disruption of our operations, misappropriation of confidential information, or damage to our computers or systems, and could result in violations of applicable privacy and other laws, financial loss to us or to our customers, customer dissatisfaction, significant litigation exposure and harm to our reputation. Further, any of these cyber security and operational risks could result in a loss of customer business, subject us to additional

 

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regulatory scrutiny or expose us to lawsuits for identity theft or other damages resulting from the misuse of their personal information and possible financial liability. Regulators may also impose penalties or require remedial action if they identify weaknesses in our security systems, and we may be required to incur significant costs to increase our cyber security to address any vulnerabilities that may be discovered or to remediate the harm caused by any security breaches.

Such a failure in business continuity or the occurrence of any such events, or any of the consequences of a successful penetration of the security of our systems, if and when experienced, may materially and adversely affect our business, financial condition and results of operations, including our ability to support and service our customer base.

If we experience problems with our originations, accounting or collection systems, our results of operations may be impaired.

We are dependent on our originations, accounting and collection systems to service our portfolio of retail installment contracts. Our ability to deliver products and services to our dealers and consumers and operate our business in compliance with applicable laws depends on the efficient and uninterrupted operation of our computer systems, as well as those of our third party service network providers. Such systems are vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer viruses and other events. Our disaster recovery planning is not sufficient for every eventuality and we do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures. Such systems problems could materially and adversely affect our business, results of operations and financial condition.

We rely on third parties to deliver services, and failure by those parties to provide these services or meet contractual requirements could have a material adverse effect on our business.

We depend on third party service providers, including certain offshore third party service providers, for certain aspects of our business operations. If a service provider fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels or compliance with applicable laws, the failure could negatively impact our business by damaging our relationship with our employees, adversely affecting our ability to process customers’ transactions in a timely and accurate manner, otherwise hampering our ability to service our customers, or subjecting us to litigation or regulatory risk, including for poor vendor oversight. Such a failure could adversely affect the perception of the reliability of our networks and services, and the quality of our brands, and could have a material and adverse effect on our business, results of operations and financial condition.

Inadequate or failed processes or systems, human factors or external events may adversely affect our profitability, reputation or operational effectiveness.

Operational risk is inherent in our business and can manifest itself in various ways, including business interruption, information systems malfunctions or failures, regulatory breaches, human errors, employee misconduct, and external fraud. These events could have a material adverse effect on our business and could harm our reputation. We attempt to control these risks and keep operational risk at low levels by maintaining a sound and well controlled environment in light of the characteristics of our business, markets and regulatory environment in which we operate. Notwithstanding these measures, operational risk is part of the business environment in which we operate, and we may incur losses from time to time due to these types or risks.

We depend on the accuracy and completeness of information about consumers, and any misrepresented information could adversely affect our business, results of operations and financial condition.

In deciding whether to approve the acquisition or creation of retail installment contracts or to enter into other transactions with consumers, we may rely on information furnished to us by or on behalf of consumers,

 

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including financial information. We also may rely on representations by and on behalf of consumers as to the accuracy and completeness of that information. If any of this information is intentionally, negligently or erroneously misrepresented and such misrepresentation is not detected prior to funding, the value of the retail installment contract may be significantly lower than expected. We have experienced in the past, and may experience in the future, frauds in application in which consumers fraudulently provide social security numbers and related FICO® Scores of other individuals or provide fictitious information with higher scores. Whether a misrepresentation is made by the applicant, a dealer customer, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected or may not detect all misrepresented information from our retail installment contract applications. Any such misrepresented information could adversely affect our business, results of operations and financial condition.

Risks Related to Legal and Regulatory Matters

If we fail to comply with regulations, our results of operations may be impaired.

Failure to comply with all laws and regulations applicable to us could materially and adversely affect our ability to operate our business. Our business is subject to numerous federal and state consumer protection laws and regulations, which, among other things:

 

   

require us to obtain and maintain certain licenses and qualifications;

 

   

limit the interest rates, fees and other charges we are allowed to charge;

 

   

limit or prescribe certain other terms of our automobile contracts;

 

   

require specific disclosures to our customers;

 

   

define our rights to repossess and sell collateral; and

 

   

require us to maintain safeguards designed to protect the security and confidentiality of customer information.

Our business has been, and industry is also, at times investigated by regulators, enforcement agencies and offices of state attorneys general, which could lead to enforcement actions, fines and penalties, suspension or termination of license and qualification to conduct business or the assertion of private claims and law suits against us. The Federal Trade Commission (“FTC”) has the authority to investigate consumer complaints against us, to conduct inquiries at its own instance, and to recommend enforcement actions and seek monetary penalties. The Bureau of Consumer Financial Protection (“BCFP”) has adopted regulations that place us and other companies similar to us under its supervision. See “—The Actions of the Bureau of Consumer Financial Protection Have Increased, and Likely will Continue to Increase, our Regulatory Compliance Efforts and Associated Costs.” Our industry has also been the subject of investigations by the United States Department of Justice and various state agencies. No assurance can be given as to the ultimate outcome of any inquiry or resulting proceeding(s), which might materially and adversely affect us.

If we fail to comply with applicable laws and regulations, such failure could result in penalties, litigation losses and expenses, damage to our reputation, or the suspension or termination of our licenses to conduct business, which would materially adversely affect our results of operations, financial condition and stock price. Furthermore, judges or regulatory agencies could interpret current rules or laws differently than the way we do, leading to such adverse consequences as described above. The resolution of such matters may require considerable time and expense, and if not resolved in our favor, may result in fines or damages, and possibly a materially adverse effect on our financial condition.

 

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The Dodd-Frank Act, financial services legislation and regulations promulgated thereunder may have an adverse effect on our business.

The Dodd-Frank Act requires the Federal banking agencies and the SEC to prescribe regulations imposing credit risk retention requirements with respect to asset-backed securities (ABS). The six federal agencies have approved a rule implementing these requirements. The rule, which became effective in February 2015, generally requires sponsors of ABS, such as us, to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance, subject to certain exceptions and exemptions. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain.

Laws in the financial services industry are designed primarily for the protection of consumers. The failure to comply could result in significant statutory civil and criminal penalties, monetary damages, attorneys’ fees and costs, possible revocation of licenses and damage to reputation, brand and valued customer relationships.

At this time, it is difficult to predict the extent to which the Dodd-Frank Act, its implementing regulations and other financial services legislation and regulation and amendments thereto, and interpretations of these laws and regulations by regulatory authorities, will affect our business. However, compliance with these laws and regulations may result in additional cost and expenses, which may adversely affect our results of operations, financial condition or liquidity.

The actions of the Bureau of Consumer Financial Protection have increased, and likely will continue to increase, our regulatory compliance efforts and associated costs.

The BCFP, which was created by the Dodd-Frank Act, has broad regulatory and enforcement authority over entities offering consumer financial products or services, including non-bank commercial companies in the business of extending credit and servicing consumer retail installment contracts, such as our business. The BCFP is authorized to write regulations under federal consumer financial protection laws, including those prohibiting unfair, deceptive or abusive acts or practices (“UDAAP”), and to examine certain financial institutions for compliance with such laws. The BCFP can institute enforcement actions to address violations of consumer protection laws, which can result in the imposition of a number of remedies, including imposing civil money penalties and requiring institutions to provide customer restitution and to improve their compliance management systems.

We are subject to the supervisory and examination authority of the BCFP with respect to compliance with federal consumer financial protection laws as a result of the agency’s authority under the Dodd-Frank Act to supervise non-depository “larger participants” in certain markets for consumer financial products or services. On June 10, 2015, the BCFP issued a final rule subjecting certain larger nonbank automobile financing companies, such as us, to the supervisory authority of the BCFP.

There continues to be uncertainty as to how the BCFP’s strategies and priorities, including its supervisory, examination and enforcement processes, will impact our business and our results of operations going forward. Actions by the BCFP may increase our compliance costs and require changes in our business practices that could limit or negatively affect the products and services that we currently offer.

In addition, the BCFP and other regulators have brought enforcement actions against lenders in connection with the sale of certain ancillary products, such as debt protection products that cancel or suspend a consumer’s monthly payment or total indebtedness if certain life events occur. Regulators have questioned such products’ value and the tactics used by lenders to sell these products.

If the BCFP changes regulations, modifies through supervision or enforcement past related regulatory guidance or interprets existing regulations in a different or stricter manner than they have been interpreted in the past by us, the industry or other regulators, our compliance costs, risk of enforcement actions, fines, penalties and

 

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litigation exposure could increase. If future regulatory or legislative restrictions or prohibitions affect our ability to finance certain products or require us to make significant changes to our business practices, and we are unable to develop compliant alternatives with acceptable returns, these restrictions could have a material adverse impact on our financial condition and results of operations.

The Dodd-Frank Act authorizes state regulators and attorneys general to enforce regulations issued by the BCFP and to enforce the Dodd-Frank Act’s general UDAAP prohibition. To the extent that states enact requirements that differ from federal standards or state officials or courts adopt interpretations of federal consumer laws that differ from those adopted by the BCFP, we may be required to alter or cease offering products or services in some jurisdictions, which would increase compliance costs, and we may be subject to a higher risk of state enforcement actions.

As a result of the enhanced consumer protection framework that has been implemented by the BCFP and other changes occurring in the regulatory environment, the amount of fees and interest we collect, the number of optional products we finance and the number of new retail installment contracts we originate could decrease, which could have a material adverse effect on our business, results of operations and financial condition.

We are subject to enhanced legal and regulatory scrutiny regarding credit bureau reporting and debt collection practices from regulators, courts and legislators.

Our balance sheet consists of predominantly non-prime consumers, which are associated with higher than average delinquency rates and charge-offs than prime consumers. Accordingly, we have significant involvement with credit bureau reporting and the collection and recovery of delinquent and charged-off debt, primarily through customer communications, the periodic sale of charged-off debt and vehicle repossession. We are subject to enhanced legal and regulatory scrutiny regarding credit bureau reporting and debt collection practices from regulators, courts and legislators. Any future changes to our business practices in these areas, including our debt collection practices, whether mandated by regulators, courts, legislators or otherwise, or any legal liabilities resulting from our business practices, including our debt collection practices, could materially and adversely affect our business, financial condition and results of operations.

Litigation and regulatory actions could subject us to significant fines, penalties, judgments and requirements resulting in increased expenses.

As an automobile financing company, we currently are, and in the future may be, subject to various consumer claims and litigation seeking damages and statutory penalties and other relief, including individual and class action lawsuits under consumer credit, consumer protection, including under the Telephone Consumer Protection Act of 1991 (“TCPA”), theft, privacy, data security, automated dialing equipment, debt collections and other laws. As the assignee of retail installment contracts originated by automobile dealers, we also may be named as a co-defendant in lawsuits filed by consumers principally against automobile dealers. Calls and/or text messages originated to our consumers may subject us to potential specific risks. For example, the TCPA restricts telemarketing and the use of technologies that enable automatic calling and/or SMS text messages to a consumer’s mobile phone without proper consent. Many of these cases present novel issues on which there is no clear legal precedent, which increases the difficulty in predicting both the potential outcomes and costs of defending these cases. The outcome of future matters could materially adversely affect our business, results of operations and financial condition.

We are also subject to regulatory examinations, investigations, inquiries, litigation, and other actions by licensing authorities, state attorneys general, the FTC, the BCFP and other governmental bodies relating to our activities. The litigation and regulatory actions to which we are or may become subject involve or may involve potential compensatory or punitive damage claims, fines, sanctions or injunctive relief that, if granted, could require us to pay damages or make other expenditures in amounts that could have a material adverse effect on our financial position and our results of operations. We have recorded loss contingencies in our financial

 

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statements only for matters on which losses are probable and can be reasonably estimated. Our assessments of these matters involve significant judgments, and may change from time to time. Actual losses incurred by us in connection with judgments or settlements of these matters may be more than our associated reserves.

Furthermore, defending lawsuits and responding to governmental inquiries or investigations, regardless of their merit, could be costly and divert management’s attention from the operation of our business. Unfavorable outcomes in any such current or future proceedings could materially and adversely affect our business, results of operations and financial condition. As a consumer finance company, we are subject to various consumer claims and litigation seeking damages and statutory penalties based upon, among other things, disclosure inaccuracies and wrongful repossession, which could take the form of a plaintiff’s class action complaint. We, as the assignee of finance contracts originated by dealers, may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. We are also subject to other litigation common to the automobile industry and to businesses in general. The damages and penalties claimed by consumers and others in these types of matters can be substantial. The relief requested by the plaintiffs varies but includes requests for compensatory, statutory and punitive damages.

While we intend to vigorously defend ourselves against such proceedings, there is a chance that our results of operations, financial condition and cash flows could be materially and adversely affected by unfavorable outcomes. Additionally, negative publicity associated with litigation, governmental investigations, regulatory actions, and other public statements could damage our reputation.

From time to time there are negative news stories about the non-prime credit industry. Such stories may follow the announcements of litigation or regulatory actions involving us or others in our industry. Negative publicity about our alleged or actual practices or about our industry generally could adversely affect our stock price and our ability to retain and attract employees.

Unlike certain competitors that are banks, we are subject to the licensing and operational requirements of states and other jurisdictions, and our business would be adversely affected if we lost our licenses.

Because we are not a nationally-chartered depository institution, we do not benefit from exemptions to state loan servicing or debt collection licensing and regulatory requirements. To the extent that they exist, we must comply with state licensing and various operational compliance requirements in all states in which we operate. These include, among others, requirements regarding form and content of contracts, other documentation, collection practices and disclosures, and record keeping. We are sensitive to regulatory changes that may increase our costs through stricter licensing laws, disclosure laws or increased fees.

In addition, we are subject to periodic examinations by state and other regulators. The states that currently do not provide extensive regulation of our business may later choose to do so. The failure to comply with licensing or permit requirements and other local regulatory requirements could result in significant statutory civil and criminal penalties, monetary damages, attorneys’ fees and costs, possible review or revocation of licenses, and damage to reputation, brand and valued customer relationships.

If we are alleged to have infringed upon the intellectual property rights owned by others or are not able to manage and protect our intellectual property, our business and results of operations could be adversely affected.

Competitors or other third parties may allege that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights. We also may face allegations that our employees have misappropriated intellectual property of their former employers or other third parties. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, an assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim (even if we ultimately prevail), pay significant

 

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money damages, lose significant revenues, be prohibited from using the relevant systems, processes, technologies or other intellectual property, cease offering certain products or services, or incur significant license, royalty or technology development expenses, and some of those licenses may not be available to us on reasonable terms. Moreover, it has become common for individuals and groups to purchase intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies like ours. Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims is time-consuming and expensive and could result in the diversion of time and attention of our management and employees. In addition, although in some cases a third party may have agreed to indemnify us for such costs, such indemnifying party may refuse or be unable to uphold its contractual obligations. In addition to infringement claims, we may also become involved in disputes with others regarding the ownership of intellectual property rights. For example, to the extent that we jointly own intellectual property with other parties, disagreements may arise as to the ownership or use of the intellectual property governed by such relationships. If we are unable to resolve these disputes, we could lose valuable intellectual property rights.

Our efforts to protect our intellectual property may not prevent misappropriation or infringement of our intellectual property or proprietary rights and a resulting loss of competitive advantage, and in any event, we may be required to litigate to protect our intellectual property and proprietary information from misappropriation or infringement by others, which is expensive, could cause a diversion of resources and management and may not be successful. Third parties may challenge, invalidate or circumvent our intellectual property, or our intellectual property may not be sufficient to provide us with competitive advantages. For example, words and devices contained in our trademarks and trade names are also found in the trade names and trademarks of a significant number of third parties. This has resulted in, and may in the future result in, challenges to our ability to use our trademarks and trade names in particular geographical areas or lines of business. Such challenges could impede our future expansion into new geographic areas or lines of business and could limit our ability to realize the full value of our trademarks and trade names. We may have to litigate to enforce or determine the scope and enforceability of our intellectual property rights, which is expensive, could cause a diversion of resources and management and may not prove successful. Existing use by others of trademarks and trade names that are similar to ours could limit our ability to challenge third parties when their use of such marks or names may cause consumer confusion, negatively affect consumers’ perception of our brand and products or dilute our brand identity.

Our competitors or other third parties may also independently design or develop similar technology, or otherwise duplicate our services or products such that we could not assert our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property or confidential and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure. The loss or diminution of our intellectual property protection or the inability to obtain third party intellectual property could have a material adverse effect on our business, results of operations and financial condition.

Risks Related to our Organization and Structure

The interests of the Continuing LLC Owners and the Continuing Common A Owners may not always coincide with our interests or the interests of our other stockholders, and may result in conflicts of interest.

The interests of the Continuing LLC Owners and the Continuing Common A Owners may not always coincide with the Company’s interests or the interests of our other stockholders. They may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. Also, Blackstone and its affiliates may seek to cause us to take courses of action that, in their judgment, could enhance their investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering. In addition, immediately following this offering and the application of net proceeds therefrom, the Continuing LLC Owners will own     % of the LLC Units and

 

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the Continuing Common A Owners will own     % of our Class A common stock. Because the Continuing LLC Owners hold their ownership interest in our business through Exeter Finance LLC, rather than through the public company, these existing owners may have conflicting interests with our public stockholders. For example, as the parties to the Tax Receivable Agreement, the TRA Parties may have different tax positions from us which could influence their decisions regarding whether and when to dispose of assets, whether and when to incur new or refinance existing indebtedness in light of the existence of the Tax Receivable Agreement that we entered in connection with this offering, and whether and when Exeter Finance Corporation should terminate the Tax Receivable Agreement and accelerate its obligations thereunder. In addition, the structuring of future transactions may take into consideration the tax or other considerations of the TRA Parties even where no similar benefit would accrue to us.

As a result of these risks, the market price of our Class A common stock could decline or stockholders might not receive a premium over the then-current market price of our Class A common stock upon a change in control. In addition, this concentration of share ownership and the rights of the controlling stockholder may adversely affect the trading price of our Class A common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders.

Our ability to pay taxes and expenses, including payments under the Tax Receivable Agreement, may be limited by our structure.

We will be a holding company with no operations and will rely on Exeter Finance LLC to provide us with funds necessary to meet any financial obligations. Upon the consummation of this offering, our principal asset will be the managing member interest of Exeter Finance LLC. As such, we will have no independent means of generating revenue. Exeter Finance LLC will be treated as a flow-through entity for U.S. federal income tax purposes and, as such, generally will not be subject to U.S. federal income tax. Instead, taxable income will be allocated to holders of its common units, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of Exeter Finance LLC and will also incur expenses related to our operations. Pursuant to the New LLC Agreement, Exeter Finance LLC will make cash distributions to the owners of common units, calculated using an assumed tax rate, to help fund their tax obligations in respect of the taxable income of Exeter Finance LLC that is allocated to them. In addition to tax expenses, we also will incur expenses related to our operations, plus payments under the Tax Receivable Agreement, which we expect will be significant. We intend to cause Exeter Finance LLC to make distributions or, in the case of certain expenses, payments in an amount sufficient to allow us to pay our taxes and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement. However, Exeter Finance LLC’s ability to make such distributions may be subject to various limitations and restrictions. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations (as a result of Exeter Finance LLC’s inability to make distributions due to various limitations and restrictions or as a result of the acceleration of our obligations under the Tax Receivable Agreement), we may have to borrow funds and thus our liquidity and financial condition could be materially and adversely affected. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments will be deferred and will accrue interest at a rate equal to LIBOR plus 500 basis points until paid (although a rate equal to LIBOR plus 100 basis points will apply if the inability to make payments under the Tax Receivable Agreement is due to limitations imposed on us or any of our subsidiaries by a debt agreement in effect at the time of this offering).

We anticipate that we will contribute to Exeter Finance LLC portions of certain distributions we receive from Exeter Finance LLC.

As described in “Certain Relationships and Related Person Transactions— Exeter Finance LLC Amended and Restated Limited Liability Company Agreement,” the New LLC Agreement provides for cash distributions, which we refer to as “tax distributions,” to be made to the holders of the LLC Units, including us, if it is determined that the income of Exeter Finance LLC will give rise to net taxable income allocable to holders of LLC Units. To the extent that the tax distributions we receive exceed the amounts we actually require to pay

 

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taxes, because of the lower tax rate applicable to us than the assumed tax rate on which such distributions are based, and we are required to make payments under the Tax Receivable Agreement, we anticipate that our board of directors will cause us to contribute such excess cash (net of any operating expenses) to Exeter Finance LLC. Concurrently with the contribution of such excess cash, in order to maintain the intended economic relationship between the shares of Class A common stock and the Class B LLC Units after accounting for such contribution, Exeter Finance LLC and we, as applicable, will undertake ameliorative actions, which may include reverse split, reclassifications, combinations, subdivisions or adjustments of the then-outstanding LLC Units and corresponding shares of Class B common stock. See “Dividend Policy.” Although we anticipate that any such decision by our board of directors would be approved by a majority of our independent directors, any cash contributed to Exeter Finance LLC would not then be available to fund cash dividends on the Class A common stock.

We will be required to pay certain of our existing owners for certain tax benefits we may claim, and we expect that the payments we will be required to make will be substantial.

Future exchanges of LLC Units and shares of Class B common stock for shares of our Class A common stock or cash are expected to produce future tax benefits for us, as are redemptions of LLC Units from certain Continuing LLC Owners as described under “Use of Proceeds.” The resulting tax basis adjustments are likely to increase (for tax purposes) our depreciation and amortization deductions and therefore reduce the amount of income tax we would be required to pay in the future in the absence of this increased tax basis. This increased tax basis may also decrease gain (or increase loss) on future dispositions of certain assets to the extent the tax basis is allocated to those assets. Under the Tax Receivable Agreement, we generally expect to retain the benefit of 15% of the applicable tax savings after our payment obligations described below are taken into account.

Upon the completion of this offering, we will be a party to the Tax Receivable Agreement. We generally will be required to pay to the TRA Parties 85% of the applicable savings, if any, in income tax that we actually realize (or in certain circumstances are deemed to realize) as a result of (1) any increase in tax basis that is created as a result of future exchanges by the Continuing LLC Owners of their LLC Units (and Class B common stock) for shares of our Class A common stock or cash, (2) any increase in tax basis as a result of redemptions of LLC Units from certain Continuing LLC Owners as described under “Use of Proceeds,” (3) our utilization of certain tax attributes of the Merging Blocker, (4) tax benefits related to imputed interest arising from payments under the Tax Receivable Agreement and (5) payments under the Tax Receivable Agreement.

The payment obligations under the Tax Receivable Agreement are obligations of the Issuer, not Exeter Finance LLC, and we expect that the payments we will be required to make under the Tax Receivable Agreement will be substantial. Assuming no material changes in the relevant tax law and that we earn sufficient taxable income to realize all tax benefits that are subject to the Tax Receivable Agreement, we expect that the tax savings we will be deemed to realize, associated with future exchanges of LLC Units as described above, would aggregate approximately $        over                years from the date of this offering, based on the initial public offering price of $        per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus, and assuming all future exchanges would occur one year after this offering. Under such scenario we would be required to pay the TRA Parties 85% of such amount, or $        , over a                year period from the date of this offering. The actual amounts may materially differ from these hypothetical amounts, as potential future tax savings we will be deemed to realize, and Tax Receivable Agreement payments by us, will be calculated based in part on the market value of our Class A common stock at the time of purchase or exchange and the prevailing tax rates applicable to us over the life of the Tax Receivable Agreement, and will generally be dependent on our ability to generate sufficient future taxable income to realize the benefit of the increases in tax basis and other tax attributes subject to the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.” Payments under the Tax Receivable Agreement are not conditioned on our existing owners’ continued ownership of us after this offering.

The actual increase in tax basis resulting from future exchanges of LLC Units (and Class B common stock) for shares of Class A common stock or cash, as well as the amount and timing of any payments under the Tax

 

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Receivable Agreement, will vary depending upon a number of factors, including the timing of exchanges by the Continuing LLC Owners, the price of our Class A common stock at the time of the exchange, whether such exchanges are taxable, the amount and timing of the taxable income we generate in the future, the tax rates then applicable and the portion of our payments under the Tax Receivable Agreement constituting imputed interest. Payments under the Tax Receivable Agreement are expected to give rise to certain additional tax benefits attributable either to additional increases in tax basis or to deductions for imputed interest, depending on the circumstances. Any such benefits are covered by the Tax Receivable Agreement and will increase the amounts due thereunder. In addition, the Tax Receivable Agreement will provide for interest, at a rate equal to LIBOR plus 100 basis points, accrued from the due date (without extensions) of the corresponding tax return to the date of payment specified by the Tax Receivable Agreement.

Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine. If the Internal Revenue Service (the “IRS”) challenges any increases in tax basis or other tax attributes subject to the Tax Receivable Agreement and any such increases in tax basis or other tax benefits are subsequently disallowed, we would not be reimbursed for any payments previously made under the Tax Receivable Agreement (although we would reduce future amounts otherwise payable under the Tax Receivable Agreement). As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the attributes to which the Tax Receivable Agreement relates.

In certain cases, payments under the Tax Receivable Agreement to our existing owners may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.

The Tax Receivable Agreement provides that (1) in the event that we materially breach any of our material obligations under the agreement, whether as a result of failure to make any payment within three months of when due (unless such failure results from the Issuer having insufficient funds to make such payment), failure to honor any other material obligation required thereunder or by operation of law as a result of the rejection of the agreement in a bankruptcy or otherwise, (2) upon certain mergers, asset sales, other forms of business combinations or other changes of control or (3) if, at any time, we elect an early termination of the agreement, our (or our successor’s) obligations under the Tax Receivable Agreement (with respect to all LLC Units, whether or not LLC Units have been exchanged or acquired before or after such transaction) would accelerate and become payable in a lump sum amount equal to the present value of the anticipated future tax benefits calculated based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the tax basis and other tax attributes subject to the Tax Receivable Agreement.

As a result of the foregoing, (1) we could be required to make payments under the Tax Receivable Agreement that are greater than or less than the specified percentage of the actual tax savings we realize in respect of the tax attributes subject to the Tax Receivable Agreement and (2) if we materially breach a material obligation under the Tax Receivable Agreement or the Tax Receivable Agreement is otherwise terminated early, we would be required to make an immediate lump sum payment equal to the present value of the anticipated future tax savings, which payment may be made significantly in advance of the actual realization of such future tax savings. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement. If we were permitted to elect to terminate the Tax Receivable Agreement immediately after this offering, based on an assumed initial public offering price of $        per share of our Class A common stock, which is the midpoint of the range set forth on the cover page of this prospectus, and a discount rate equal to     %, we estimate that we would be required to pay $        in the aggregate under the Tax Receivable Agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.

 

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In certain circumstances, Exeter Finance LLC will be required to make distributions to us and the existing owners of Exeter Finance LLC and the distributions that Exeter Finance LLC will be required to make may be substantial.

Exeter Finance LLC will be treated as a partnership for U.S. federal income tax purposes and, as such, generally will not be subject to U.S. federal income tax. Instead, taxable income will be allocated to holders of its LLC Units, including us. Pursuant to the New LLC Agreement, Exeter Finance LLC will make pro rata cash distributions, or tax distributions, to the owners of LLC Units, calculated using an assumed tax rate.

Funds used by Exeter Finance LLC to satisfy its tax distribution obligations will not be available for reinvestment in our business. Moreover, the tax distributions that Exeter Finance LLC will be required to make may be substantial, and may exceed (as a percentage of Exeter Finance LLC taxable income) the overall effective tax rate applicable to a similarly situated corporate taxpayer. In addition, because these payments will be calculated with reference to an assumed tax rate, these payments may significantly exceed the actual tax liability for many of the existing owners of Exeter Finance LLC.

As a result of the use of an assumed tax rate in calculating Exeter Finance LLC’s distribution obligations, we may receive distributions significantly in excess of our tax liabilities and obligations to make payments under the Tax Receivable Agreement. To the extent, as currently expected, we do not distribute such cash balances as dividends on our Class A common stock and instead, for example, hold such cash balances or lend them to Exeter Finance LLC, the existing owners of Exeter Finance LLC would benefit from any value attributable to such accumulated cash balances as a result of their ownership of Class A common stock following an exchange of their LLC Units (together with corresponding shares of Class B common stock). See “Organizational Structure—Reorganization Transactions—Amendment of the Limited Liability Company Agreement of Exeter Finance LLC” and “Organizational StructureOrganizational Structure Following This Offering.”

We will not be reimbursed for any payments made to our existing owners under the Tax Receivable Agreement in the event that any tax benefits are disallowed.

If the IRS challenges any increases in tax basis or other tax attributes that give rise to payments under the Tax Receivable Agreement and any such increases in tax basis or other tax attributes are subsequently disallowed, the recipients of payments under those agreements will not reimburse us for any payments we previously made to them. Any such disallowance would be taken into account in determining future payments under the Tax Receivable Agreement and would, therefore, reduce the amount of any such future payments. Nevertheless, if the claimed tax benefits from any increases in tax basis or other tax attributes are disallowed, our payments under the Tax Receivable Agreement could exceed our actual tax savings, and we may not be able to recoup payments under the Tax Receivable Agreement that were calculated on the assumption that the disallowed tax savings were available.

Risks Related to Our Class A Common Stock and This Offering

Immediately following this offering, Blackstone and its affiliates will control us and their interests may conflict with ours or yours in the future.

Immediately following this offering, Blackstone and its affiliates will hold     % of the combined voting power of our Class A and Class B common stock (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock to cover over-allotments). Moreover, under our bylaws and the stockholders’ agreement with Blackstone and its affiliates that will be in effect by the completion of this offering, for so long as Blackstone and its affiliates retain significant ownership of us, we will agree to nominate to our board individuals designated by Blackstone. Even when Blackstone and its affiliates cease to own shares of our stock representing a majority of the total voting power, for so long as Blackstone continues to own a significant percentage of our stock Blackstone will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval through its voting power.

 

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Accordingly, for such period of time, Blackstone will have significant influence with respect to our management, business plans and policies, including the appointment and removal of our officers. In particular, for so long as Blackstone continues to own a significant percentage of our stock, Blackstone will be able to cause or prevent a change of control of our company or a change in the composition of our board of directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could deprive you of an opportunity to receive a premium for your shares of Class A common stock as part of a sale of our company and ultimately might affect the market price of our Class A common stock.

Blackstone and its affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, Blackstone and its affiliates may engage in activities where their interests conflict with our interests or those of our stockholders. Our amended and restated certificate of incorporation will provide that none of Blackstone, any of its affiliates or any director who is not employed by us (including any non-employee director who serves as one of our officers in both his director and officer capacities) or his or her affiliates will have any duty to refrain from engaging, directly or indirectly, in the same business activities or similar business activities or lines of business in which we operate. Blackstone and its affiliates also may pursue acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us. In addition, Blackstone and its affiliates may have an interest in us pursuing acquisitions, divestitures and other transactions that, in its judgment, could enhance its investment, even though such transactions might involve risks to you.

Upon the listing of our shares of Class A common stock on the NYSE, we will be a “controlled company” within the meaning of NYSE rules and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, affiliates of Blackstone will continue to control a majority of the combined voting power of all classes of our stock entitled to vote generally in the election of directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a company of which more than 50% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements that, within one year of the date of the listing of our Class A common stock:

 

   

we have a board that is composed of a majority of “independent directors,” as defined under the rules of such exchange;

 

   

we have a compensation committee that is composed entirely of independent directors; and

 

   

we have a corporate governance and nominating committee that is composed entirely of independent directors.

Following this offering, we intend to utilize these exemptions. As a result, we do not expect that a majority of the directors on our board will be independent upon completion of this offering. In addition, we do not expect that any of the committees of the board will consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the                .

We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), and

 

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related rules implemented by the SEC and the NYSE. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock may be negatively affected.

As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we expect we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. Our independent registered public accounting firm will also be required to express an opinion as to the effectiveness of our internal control over financial reporting. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.

The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Class A common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

There may not be an active trading market for shares of our Class A common stock, which may cause shares of our Class A common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of Class A common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our Class A common stock. It is possible that after this offering, an active trading market will not develop or continue or, if developed, that any market will not be sustained, which would make it difficult for you to sell your shares of Class A common stock at an attractive price or at all. The initial public offering price per share of Class A common stock was determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which shares of our Class A common stock will trade in the public market after this offering. Additionally, our Class A common stock likely will not be eligible to be included in certain stock indices because of our dual class voting structure. For example, in July 2017, S&P Dow Jones stated that companies with multiple share classes will not be eligible for inclusion in the S&P Composite 1500 (comprised of the S&P 500, S&P MidCap 400 and S&P SmallCap 600).

 

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The market price of shares of our Class A common stock may be volatile, which could cause the value of your investment to decline.

Even if a trading market develops, the market price of our Class A common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our Class A common stock regardless of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to stockholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our Class A common stock could decrease significantly. You may be unable to resell your shares of Class A common stock at or above the initial public offering price.

In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Because we have no current plans to pay cash dividends on our Class A common stock, you may not receive any return on investment unless you sell your Class A common stock for a price greater than that which you paid for it.

We have no current plans to pay any cash dividends. The declaration, amount and payment of any future dividends on shares of Class A common stock will be at the sole discretion of our board of directors. Our board of directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. In addition, our ability to pay dividends is limited by our warehouse facility and our senior note and may be limited by covenants of other indebtedness we or our subsidiaries incur in the future. As a result, you may not receive any return on an investment in our Class A common stock unless you sell our Class A common stock for a price greater than that which you paid for it.

Investors in this offering will experience immediate and substantial dilution.

The initial public offering price per share of Class A common stock will be substantially higher than our pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share of Class A common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. In addition, you will pay more for your shares of Class A common stock than the amounts paid for the LLC Units (together with the corresponding shares of our Class B common stock) by our existing owners. Assuming an offering price of $        per share of Class A common stock, which is the midpoint of the range on the front cover of this prospectus, you will incur immediate and substantial dilution in an amount of $        per share of Class A common stock.

 

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You may be diluted by the future issuance of additional Class A common stock in connection with our incentive plans, acquisitions, capital raises or otherwise.

After this offering we will have approximately                  shares of Class A common stock authorized but unissued, including approximately                  shares of Class A common stock issuable upon exchange of LLC Units (together with corresponding shares of our Class B common stock) that will be held by members of Exeter Finance LLC. Our amended and restated certificate of incorporation to become effective prior to the consummation of this offering authorizes us to issue these shares of Class A common stock and options, rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. Similarly, the limited liability company agreement of Exeter Finance LLC permits Exeter Finance LLC to issue an unlimited number of additional LLC units of Exeter Finance LLC with designations, preferences, rights, powers and duties that are different from, and may be senior to, those applicable to the LLC Units, and which may be exchangeable for shares of our Class A common stock (together with corresponding shares of our Class B common stock). Additionally, we have reserved an aggregate of                  shares of Class A common stock and LLC Units for issuance under our Omnibus Incentive Plan. Any Class A common stock that we issue, including under our Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who purchase Class A common stock in this offering.

If we or our existing owners sell additional shares of our Class A common stock after this offering, the market price of our Class A common stock could decline.

The sale of substantial amounts of shares of our Class A common stock in the public market, or the perception that such sales could occur, could harm the prevailing market price of shares of our Class A common stock. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. Upon completion of this offering we will have a total of                  shares of our Class A common stock outstanding (or                  shares if the underwriters exercise in full their option to purchase additional shares to cover over-allotments) and an additional                  shares of our Class A common stock issuable upon exchange of LLC Units (together with the corresponding shares of our Class B common stock) will be held by members of Exeter Finance LLC. Of the outstanding shares of Class A common stock, the                  shares sold in this offering (or                  shares if the underwriters exercise in full their option to purchase additional shares to cover over-allotments) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The remaining outstanding                  shares of Class A common stock held by or issuable to our existing owners and management after this offering will be subject to certain restrictions on resale. We, our officers, directors and holders of certain of our outstanding shares of Class A common stock immediately prior to this offering, including Blackstone, that collectively will own                  shares of Class A common stock (including shares issuable on exchange of LLC Units) following this offering (or                  shares of Class A common stock if the underwriters exercise in full their option to purchase additional shares to cover over-allotments), will sign lock-up agreements with the underwriters that will, subject to certain customary exceptions, restrict the sale of the shares of our common stock held by them for 180 days following the date of this prospectus. Citigroup Global Markets Inc. and Wells Fargo Securities LLC may, in their sole discretion, release all or any portion of the shares of Class A common stock subject to lock-up agreements. Upon the expiration of the lock-up agreements, all of such shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that Blackstone will be considered an affiliate 180 days after this offering based on their expected share ownership, as well as their board nomination rights. Certain other of our stockholders may also be considered affiliates at that time. However, commencing 180 days following this offering, the holders of these shares of Class A common stock will have the

 

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right, subject to certain exceptions and conditions, to require us to register their shares of Class A common stock under the Securities Act, and they will have the right to participate in future registrations of securities by us. Registration of any of these outstanding shares of Class A common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

We intend to file one or more registration statements on Form S-8 under the Securities Act to register shares of our Class A common stock or securities convertible into or exchangeable for shares of our Class A common stock issued pursuant to our Omnibus Incentive Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market. We expect that the initial registration statement on Form S-8 will cover                  shares of our Class A common stock.

We will also enter into a registration rights agreement with certain existing owners that will require us to register under the Securities Act shares of Class A common stock held, or issuable upon exchange, by such existing owners. Class A common shares registered pursuant to such agreement will also be available for sale in the open market upon such registration.

As restrictions on resale end, the market price of our shares of Class A common stock could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of Class A common stock or other securities.

Anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.

Our amended and restated certificate of incorporation and amended and restated bylaws to become effective prior to the consummation of this offering will contain provisions that may make the merger or acquisition of our company more difficult without the approval of our board of directors. Among other things, these provisions will:

 

   

allow us to authorize the issuance of undesignated preferred stock in connection with a stockholder rights plan or otherwise, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of Class A common stock;

 

   

prohibit stockholder action by written consent from and after the date on which the parties to our stockholders’ agreement cease to beneficially own at least 30% of the total voting power of all then outstanding shares of our capital stock unless such action is recommended by all directors then in office and stockholder ability to call special meetings;

 

   

provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws and that our stockholders may only amend our bylaws with the approval of 66 2/3% or more in voting power of all outstanding shares of our capital stock, if Blackstone and its affiliates beneficially own less than 30% in voting power of our stock entitled to vote generally in the election of directors;

 

   

establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and

 

   

prohibit any stockholder or group (other than Blackstone and its affiliates) which beneficially owns in the aggregate more than 9.99% of the total voting power of the then-outstanding shares of our capital stock as of any record date for the determination of stockholders entitled to vote on any matter from voting more than 9.99% of the total voting power of the then-outstanding shares of our capital stock entitled to vote on matters presented to our stockholders for their vote or approval without the required

 

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notice or consent for voting such shares has been provided or obtained as required by any federal, state or local consumer or other law, regulation or regulatory authority applicable to or having jurisdiction over us or any of our subsidiaries.

Further, as a Delaware corporation, we are also subject to provisions of Delaware law, which may impair a takeover attempt that our stockholders may find beneficial. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our Class A common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.

Our amended and restated certificate of incorporation will designate the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for certain disputes with us or our directors, officers or employees.

Our amended and restated certificate of incorporation will provide that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on our behalf, (ii) action asserting a claim of breach of a fiduciary duty owed by any of our directors or officers to us or our stockholders, creditors, or other constituents, (iii) action asserting a claim against us or any our directors or officers arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or our amended and restated bylaws, or (iv) action asserting a claim against us or any of our directors or officers governed by the internal affairs doctrine, provided, however, that, in the event that the Court of Chancery of the State of Delaware lacks subject matter jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another state or federal court located within the State of Delaware, in each such case, unless the Court of Chancery (or such other state or federal court located within the State of Delaware, as applicable) has dismissed a prior action by the same plaintiff asserting the same claims because such court lacked personal jurisdiction over an indispensable party named as a defendant therein. The Court of Chancery of the State of Delaware is not the sole and exclusive forum for actions brought under the federal securities laws. Any person or entity purchasing or otherwise acquiring any interest in our shares of capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring claim in a judicial forum that it finds favorable for disputes with us or our directors, officers and other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

State licensing laws and regulations may delay, discourage or otherwise impede investors from purchasing our Class A common stock.

Certain of the states in which we are licensed to provide consumer finance services have laws or regulations which require regulatory notice or approval for the acquisition of “control” of regulated entities. Under some state laws or regulations applicable to licensing, there exists a presumption of “control” when an acquiring party acquires 10% or more of the voting securities of a regulated entity or of a company which itself controls (directly or indirectly) a regulated entity. Therefore, in connection with any person acquiring 10% or more of our combined common stock, it may be necessary to seek the prior notification to or approval of some state licensing regulators, or a determination from such regulators that “control” has not been acquired. Furthermore, upon the acquisition of 10% or more of our combined common stock, state regulators may require certain information

 

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about the acquirers. Such laws or regulations could significantly delay, discourage, or otherwise impede investors’ ability to acquire our Class A common stock.

Our Class A common stock is and will be subordinate to all of our existing and future indebtedness and any preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.

Shares of our Class A common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, holders of our Class A common stock may become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred stock that our board of directors may designate and issue without any action on the part of the holders of our Class A common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors and preferred stockholders.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends,” and similar words or phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors, some of which are beyond our control. For more information regarding these risks and uncertainties as well as certain additional risks that we face, refer to the “Risk Factors,” as well as factors more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Among the factors that could cause our financial performance to differ materially from that suggested by the forward-looking statements are:

 

   

our ability to maintain adequate liquidity to fund our operations as our business could suffer if access to funding is reduced;

 

   

changes in the asset-backed securities markets, including changes in investor demand for our ABS securities may negatively impact our results;

 

   

the strength of the U.S. automotive industry directly impacts earnings and future prospects which may negatively impact our results;

 

   

our business is affected by national, regional, and local economic conditions, as well as the perception of those conditions and future economic prospects, which could materially adversely affect our business. For example, changes in economic and market conditions including changes in employment rates, consumer disposable income, and prices of new and used automobiles;

 

   

the adequacy of our risk management framework;

 

   

our ability to manage interest rate and other market risks, including the availability of financial instruments needed for risk management purposes;

 

   

our ability to manage credit risks, including the effect of changes in underwriting and servicing practices, may impact the credit performance of our loan receivables portfolio that could negatively impact our financial condition, liquidity, and results of operations;

 

   

we operate in a highly regulated industry and continually changing federal, state, and local laws and regulations may negatively impact our results and could limit certain of our business activities;

 

   

our ability to effectively execute our business strategies, implement new initiatives, and improve efficiency;

 

   

we face significant risks implementing our growth strategy, some of which are outside our control;

 

   

our strategic partnership agreements may not result in currently anticipated levels of growth and are subject to certain performance conditions that could result in modification or termination of these agreements;

 

   

our business could suffer if we are unsuccessful in developing and maintaining relationships with automobile dealerships;

 

   

our ability to remediate any material weaknesses in internal controls over financial reporting completely and in a timely manner;

 

   

changes or errors in the methodologies, models, assumptions and estimates we use to prepare our financial statements, make business decisions, and manage risks;

 

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loss of key management or other personnel, or an inability to attract qualified management and personnel, could negatively impact our business;

 

   

our ability to maintain the security of our operating systems and infrastructure (e.g., against cyber-attacks); and

 

   

other factors and assumptions described in this prospectus.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, its actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, we caution not to place undue reliance on any forward-looking information or statements. The effect of these factors is difficult to predict. Factors other than these also could adversely affect our results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. New factors emerge from time to time, and management cannot assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements only speak as of the date of this document, and we undertake no obligation to update any forward-looking information or statements, whether written or oral, to reflect any change, except as required by law. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

 

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ORGANIZATIONAL STRUCTURE

Organizational Structure Prior to This Offering

The following simplified diagram depicts our organizational structure prior to the Reorganization Transactions. This chart is provided for illustrative purposes only and does not purport to represent all legal entities within our organizational structure.

 

 

LOGO

 

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Organizational Structure Following This Offering

The simplified diagram below depicts our organizational structure immediately following the Reorganization Transactions and this offering assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock.

 

 

LOGO

Immediately following this offering, Exeter Finance Corporation will be a holding company and will hold all the managing member interests in Exeter Finance LLC. Exeter Finance Corporation will operate and control all of the business and affairs of Exeter Finance LLC. We will include Exeter Finance LLC in our consolidated financial statements and will report a non-controlling interest related to the LLC Units held by the Continuing LLC Owners on our consolidated financial statements.

Our post-offering organizational structure will allow the Continuing LLC Owners to retain their equity ownership in Exeter Finance LLC, an entity that will be classified as a partnership for U.S. federal income tax purposes, in the form of LLC Units. Investors participating in this offering will, by contrast, hold equity in Exeter Finance Corporation, a Delaware corporation that is a domestic corporation for U.S. federal income tax purposes, in the form of shares of our Class A common stock. The Continuing LLC Owners and Exeter Finance Corporation will incur U.S. federal, state and local income taxes on their allocable share of any taxable income of Exeter Finance LLC as calculated pursuant to the New LLC Agreement we will enter into in connection with this offering and the Reorganization Transactions.

 

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As described below, each of the Continuing LLC Owners will also hold a number of shares of Class B common stock of the Issuer equal to the number of LLC Units held by such person. Although these shares have no economic rights, they will allow such owners to directly exercise voting power at the Issuer, which will be the managing member of Exeter Finance LLC, at a level that is consistent with their overall equity ownership of our business. Under our amended and restated certificate of incorporation, each share of Class A common stock and Class B common stock shall be entitled to one vote, voting as a single class except as otherwise required by applicable law or our Certificate of Incorporation. When an LLC Unit is exchanged by a Continuing LLC Owner (which we would generally expect to occur in connection with a sale or other transfer), a corresponding share of Class B common stock held by the exchanging owner is also exchanged and will be canceled. Shares of Class B common stock are not transferable except together with the transfer of an equal number of LLC Units.

Incorporation of the Issuer

The Issuer was incorporated by BCP Enzo Holdings, LLC, an existing owner and an affiliate of Blackstone, as a Delaware corporation on July 20, 2018. Except in connection with its incorporation and in connection with the transactions described below under “Reorganization Transactions,” the Issuer has not, and will not, engage in any business or other activities prior to this offering. The Issuer’s amended and restated certificate of incorporation will authorize two classes of common stock, Class A common stock and Class B common stock, each having the terms described in “Description of Capital Stock.”

Reorganization Transactions

As part of the Reorganization Transactions, the following steps will occur (collectively, the “Reorganization Transactions”):

 

   

we will amend the limited liability company agreement of Exeter Finance LLC, as described below;

 

   

Enzo Parent, LLC, which, prior to the Reorganization Transactions, is the direct owner of 100% of the common equity of Exeter Finance LLC, will distribute to the existing owners all LLC units of Exeter Finance LLC it holds;

 

   

BCP Enzo Holdings, LLC will distribute the LLC Units it receives from Enzo Parent, LLC to BCP VI Exeter Feeder Fund LP (“Merging Blocker”), an affiliate of Blackstone and a Delaware entity taxed as a corporation for U.S. federal income tax purposes;

 

   

the Merging Blocker will merge with and into the Issuer, with the Issuer as the surviving entity, in a transaction intended to qualify as tax-free for U.S. federal income tax purposes. In the merger, the equity holders of Merging Blocker (the “Continuing Common A Owners”) will receive collectively one share of Class A common stock for each LLC Unit owned by such Merging Blocker at the time of the merger;

 

   

Exeter Finance LLC will purchase for cash Class B common stock of the Issuer and will distribute such Class B common stock to the Continuing LLC Owners; and

 

   

we will enter into the Tax Receivable Agreement, as described below.

Amendment of the Limited Liability Company Agreement of Exeter Finance LLC

As part of the Reorganization Transactions, the limited liability company agreement of Exeter Finance LLC will be amended and restated to, among other things, appoint the Issuer as its sole managing member and recapitalize the existing common interests in Exeter Finance LLC into two classes of limited liability company interests. We refer to the limited liability company agreement of Exeter Finance LLC, as in effect at the time of completion of this offering, as the “New LLC Agreement.”

Exeter Finance Corporation, as the sole managing member of Exeter Finance LLC, will have the right to determine when distributions will be made to the unit holders of Exeter Finance LLC and the amount of any such

 

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distributions (subject to the provisions of the New LLC Agreement, including with respect to the tax distributions described below). If we authorize a distribution, such distribution will be made to the holders of LLC Units, including Exeter Finance Corporation, pro rata in accordance with their respective ownership interests in Exeter Finance LLC. Exeter Finance Corporation, as sole managing member, will be entitled to reimbursement for certain fees and expenses of the Issuer.

Upon the consummation of this offering, we will be a holding company and our principal asset will be the managing member interest of Exeter Finance LLC. As such, we will have no independent means of generating revenue. Exeter Finance LLC will be treated as a partnership for U.S. federal income tax purposes and, as such, generally will not be subject to U.S. federal income tax. Instead, taxable income will be allocated to holders of LLC Units, including the Issuer. Accordingly, the Issuer will incur income taxes on its allocable share of any net taxable income of Exeter Finance LLC and will also incur expenses related to its operations. Pursuant to the New LLC Agreement, Exeter Finance LLC will make pro rata cash distributions to the holders of LLC Units, calculated using an assumed tax rate, to help to fund their tax obligations in respect of the taxable income of Exeter Finance LLC that is allocated to them. Generally, these tax distributions will be computed based on an assumed U.S. federal income tax rate equal to     % and state income tax rate of approximately     %. Exeter Finance LLC will make tax distributions pro rata in accordance with LLC Unit ownership. To the extent that the tax distributions we receive exceed the amounts we actually require to pay taxes, because of the lower tax rate applicable to us that the assumed tax rate on which such distributions are based, and we are required to make payments under the Tax Receivable Agreement, we anticipate that our board of directors will cause us to contribute such excess cash (net of any operating expenses) to Exeter Finance LLC. Concurrently with the contribution of such excess cash, in order to maintain the intended economic relationship between the shares and Class A common stock and the Class B LLC Units after accounting for such contribution, Exeter Finance LLC and we, as applicable, will undertake ameliorative actions, which may include reverse splits, reclassifications, combinations, subdivisions or adjustments of the then-outstanding LLC Units and corresponding shares of Class B common stock. In addition to tax expenses, we will incur expenses related to our operations, plus payments under the Tax Receivable Agreement, which we expect will be significant. We intend to cause Exeter Finance LLC to make distributions or, in the case of certain expenses, payments in an amount sufficient to allow the Issuer to pay its taxes and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement.

Pursuant to the New LLC Agreement, the Continuing LLC Owners (or certain permitted transferees thereof) will have the right, subject to the terms of the New LLC Agreement, to exchange their LLC Units, together with a corresponding number of shares of Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for stock splits, stock dividends, reclassifications and other similar transactions, or for cash (based on the market price of the shares of Class A common stock), at the option of Exeter Finance LLC such determination to be made by the independent members of our Board of Directors acting on our behalf in our capacity as managing member of Exeter Finance LLC. In limited circumstances For LLC Unitholders who are not officers, directors or 5% or more stockholders, such independent members of the Board of Directors may delegate such determination to certain members of our management. The New LLC Agreement will also provide that as a general matter a Continuing LLC Owner will not have the right to exchange LLC Units if we determine that such exchange would be prohibited by law or regulation or would violate other agreements with us to which the Continuing LLC Owner may be subject, including the New LLC Agreement. We may impose additional restrictions on exchange that we determine to be necessary or advisable so that Exeter Finance LLC is not treated as a “publicly traded partnership” taxable as a corporation for U.S. federal income tax purposes. As the Continuing LLC Owners exchange LLC Units and Class B common stock for shares of Class A common stock or cash, the number of LLC Units held by the Issuer will correspondingly be increased as it acquires the exchanged LLC Units and a corresponding number of shares of Class B common stock are canceled. See “Certain Relationships and Related Party Transactions.”

As noted above, each of the Continuing LLC Owners will also hold a number of shares of our Class B common stock equal to the number of LLC Units held by such person. Although these shares have no economic rights, they will allow such Continuing LLC Owners to directly exercise voting power at the Issuer at a level that

 

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is consistent with their overall equity ownership of our business. Under our amended and restated certificate of incorporation, each share of Class B common stock will be entitled to one vote.

Tax Receivable Agreement

Future exchanges of LLC Units, together with the corresponding shares of Class B common stock, for shares of our Class A common stock or cash are expected to produce favorable tax attributes for us, as are redemptions of LLC Units from certain Continuing LLC Owners as described under “Use of Proceeds.” These tax attributes would not be available to us in the absence of those transactions. Immediately prior to the closing of this offering, we, Exeter Finance LLC and the TRA Parties will enter into the Tax Receivable Agreement. Under this agreement, we generally expect to retain the benefit of 15% of the applicable tax savings after our payment obligations below are taken into account.

Under the Tax Receivable Agreement, we generally will be required to pay to the TRA Parties 85% of the applicable savings, if any, in U.S. federal, state, and local income tax that we actually realize (or in some circumstances are deemed to realize) as a result of:

 

   

certain tax attributes created in the future as a result of exchanges by Continuing LLC Owners of their LLC Units, together with the corresponding shares of Class B common stock, for shares of our Class A common stock or cash, at the election of Exeter Finance LLC;

 

   

certain tax attributes created as a result of redemptions of LLC Units from certain Continuing LLC Owners as described under “Use of Proceeds”;

 

   

our utilization of certain tax attributes of the Merging Blocker;

 

   

tax benefits related to imputed interest arising from payments under the Tax Receivable Agreement; and

 

   

payments under the Tax Receivable Agreement.

See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement.

This Offering

In connection with the completion of this offering, we intend to contribute all of the proceeds we receive from this offering to purchase newly-issued LLC Units at a purchase price per LLC Unit equal to the price per share of Class A common stock sold to the public in this offering, less the applicable underwriting discounts and commissions. We intend to cause Exeter Finance LLC to use such proceeds as follows:

 

 

$             (or $             if the underwriters exercise in full their option to purchase additional Class A common stock to cover over-allotments, if any) to redeem                  LLC Units from certain Continuing LLC Owners at a price per LLC Unit equal to the public offering price per share of Class A common stock in this offering, less the underwriters discount;

 

 

to pay the expenses of this offering; and

 

 

the balance for general corporate purposes.

Assuming (a) an initial public offering price of $        per share of Class A common stock (the midpoint of the range set forth on the cover page of this prospectus), and (b) no exercise of the underwriters’ option to purchase additional shares of Class A common stock solely to cover over-allotments, if any, after giving effect to the Reorganization Transactions, and the use of proceeds as described under “Use of Proceeds” there will be                LLC Units outstanding (or                LLC Units outstanding, if the underwriters exercise in full their option to purchase additional shares of Class A common stock), and we will own a number of such LLC Units equal to the number of outstanding shares of the Issuer’s Class A common stock, including the shares of Class A common stock issued to the Continuing Common A Owners.

 

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Accordingly, following this offering, we will directly hold one LLC Unit for every share of Class A common stock outstanding, a relationship that we believe fosters transparency because it results in a single share of Class A common stock representing the same percentage ownership in Exeter Finance LLC as a single LLC Unit.

Following This Offering

The Continuing LLC Owners (or certain permitted transferees thereof) may, subject to the terms of the New LLC Agreement, exchange their LLC Units, together with a corresponding number of shares of Class B common stock, for shares of our Class A common stock on a one-for-one basis, subject to customary adjustments for stock splits, stock dividends, reclassifications and other similar transactions, or, for cash (based on the market price of the shares of Class A common stock), at the option of Exeter Finance LLC (such determination to be made by the independent members of our Board of Directors acting on our behalf in our capacity as managing member of Exeter Finance LLC). See “Organizational Structure—Amendment of the Limited Liability Company Agreement of Exeter Finance LLC.” These exchanges are expected to result in increases in the tax basis of the assets of Exeter Finance LLC that otherwise would not have been available. The increases in tax basis resulting from such exchanges may reduce the amount of tax that the Issuer would otherwise be required to pay in the future. This increase in tax basis may also decrease gains (or increase losses) on future dispositions of certain assets to the extent the increase in tax basis is allocated to those assets.

The Issuer may accumulate cash balances in future years resulting from distributions from Exeter Finance LLC exceeding its tax or other liabilities. To the extent the Issuer does not use such cash balances to pay a dividend on or repurchase shares of Class A common stock and instead decides to hold or recontribute such cash balances to Exeter Finance LLC for use in its operations, Continuing LLC Owners who exchange LLC Units and shares of Class B common stock for shares of Class A common stock or cash in the future could also benefit from any value attributable to such accumulated cash balances. See “Risk Factors-Risks Related to our Organizational Structure—In certain circumstances, Exeter Finance LLC will be required to make distributions to us and the existing owners of Exeter Finance LLC and the distributions that Exeter Finance LLC will be required to make may be substantial.”

Upon completion of this offering and the use of proceeds:

 

   

Our Class A common stock will be held as follows:

                shares (or                  shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock) by investors in this offering; and                  shares by the Continuing Common A Owners.

 

   

Our Class B common stock (together with the same amount of LLC Units) will be held as follows:

                shares and LLC Units by the Continuing LLC Owners.

 

   

The combined voting power in the Issuer will be as follows:

    % for investors in this offering (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock);

    % for the Continuing Common A Owners (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock); and

    % for the Continuing LLC Owners (or     % if the underwriters exercise in full their option to purchase additional shares of Class A common stock).

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of shares of our Class A common stock by us in this offering, after deducting estimated underwriting discounts and commissions, will be approximately $         (or approximately $        if the underwriters exercise in full their option to purchase additional shares of Class A common stock to cover over-allotments), assuming an initial public offering price of $        per share (the midpoint of the range set forth on the cover page of this prospectus). Each $1 increase (decrease) in the public offering price per share would increase (decrease) our net proceeds by $        .

We intend to contribute all of the proceeds to us to purchase newly-issued LLC Units from Exeter Finance LLC as described under “Organizational Structure—This Offering.” We intend to cause Exeter Finance LLC to use such proceeds as follows:

 

   

$         (or $         if the underwriters exercise in full their option to purchase additional Class A common stock to cover over-allotments, if any) to redeem                  LLC Units from certain Continuing LLC Owners at a price per LLC Unit equal to the public offering price per share of Class A common stock in this offering, less the underwriters discount;

 

   

to pay the expenses of this offering; and

 

   

the balance for general corporate purposes.

Pending specific application of these proceeds, Exeter Finance LLC expects to invest the balance of the proceeds primarily in short term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the United States government.

We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders.

 

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DIVIDEND POLICY

We currently do not anticipate paying any cash dividends on our Class A common stock in the foreseeable future. The declaration, amount and payment of any future dividends on shares of Class A common stock will be at the sole discretion of our board of directors and we may reduce or discontinue entirely the payment of any such dividends at any time. Our board of directors may take into account general and economic conditions, our financial condition and operating results, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of directors may deem relevant.

Immediately following this offering, the Issuer will be a holding company and its principal asset will be the managing member interest of Exeter Finance LLC. If the Issuer decides to pay a dividend in the future, it would need to cause Exeter Finance LLC to make distributions to the Issuer in an amount sufficient to cover such dividend.

The New LLC Agreement will provide for regular periodic cash distributions, which we refer to as “tax distributions,” to be made to holders of the LLC Units, including us, if it is determined that the income of Exeter Finance LLC will give rise to net taxable income allocable to holders of the LLC Units. To the extent that the tax distributions we receive exceed the amounts we actually require to pay taxes, because of the lower tax rate applicable to us than the assumed tax rate on which such distributions are based, and we are required to make payments under the Tax Receivable Agreement (as defined below), we anticipate that our board of directors will cause us to contribute such excess cash (net of any operating expenses) to Exeter Finance LLC. Concurrently with the contribution of such excess cash, in order to maintain the intended economic relationship between the shares of Class A common stock and the Class B LLC Units after accounting for such contribution, Exeter Finance LLC and we, as applicable, will undertake ameliorative actions, which may include reverse split, reclassifications, combinations, subdivisions or adjustments of outstanding LLC Units and corresponding shares of Class B common stock.

Our ability to pay dividends on our Class A common stock is limited by our existing indebtedness and may be further restricted by the terms of any future debt. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” In addition, Exeter Finance LLC is generally prohibited under Delaware law from making a distribution to unit holders (including us) to the extent that, at the time of the distribution, after giving effect to the distribution, liabilities of Exeter Finance LLC (with certain exceptions) exceed the fair value of its assets. Subsidiaries of Exeter Finance LLC are generally subject to similar legal limitations on their ability to make distributions to Exeter Finance LLC.

Because Exeter Finance Corporation must pay taxes and make payments under the Tax Receivable Agreement, any amounts ultimately distributed as dividends to holders of our Class A common stock are expected to be less than the amounts distributed by Exeter Finance LLC to its members on a per LLC Unit basis.

 

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CAPITALIZATION

The following table sets forth our cash, cash equivalents and capitalization as of September 30, 2018:

 

   

on a historical basis; and

 

   

on a pro forma basis to reflect (i) the Reorganization Transactions described under “Organizational Structure,” (ii) the creation of certain tax assets in connection with this offering and the Reorganization Transactions, (iii) the creation of related party liabilities in connection with entering into the Tax Receivable Agreement with the TRA Parties and (iv) the sale by us of                  shares of Class A common stock in this offering and the application of the proceeds from this offering as described in “Use of Proceeds,” based on an assumed initial public offering price of $        per share, the midpoint of the range set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions and estimated offering expenses. Each $1 increase (decrease) in the public offering price per share would increase (decrease) our total stockholders’ equity and total capitalization by approximately $         (assuming no exercise of the underwriters’ option to purchase additional shares solely to cover over-allotments, if any).

This table should be read in conjunction with “Organizational Structure,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Information” and the consolidated financial statements and notes thereto appearing elsewhere in this prospectus.

 

     September 30, 2018  
($ thousands, except share-related amounts)    Historical      Pro Forma  
     (unaudited)         

Cash and cash equivalents

   $ 17,714      $                

Restricted cash and cash equivalents

     283,690     
  

 

 

    

 

 

 

Total cash, restricted cash and cash equivalents

   $ 301,404      $    
  

 

 

    

 

 

 

Warehouse facility

   $ 354,600      $    

Senior note, net

     175,000     

Securitization notes payable, net

     2,995,394     
  

 

 

    

 

 

 

Total debt

     3,524,994     
  

 

 

    

 

 

 

Member’s equity

     396,127     

Preferred stock, $0.0001 par value,                  shares authorized, none issued and outstanding

     —       

Class A common stock, $0.0001 par value,                  shares authorized,                 issued and outstanding

     —       

Class B common stock, $0.0001 par value,                  shares authorized,                 issued and outstanding

     —       

Additional paid-in capital

     

Retained earnings

     

Non-controlling interests

     
  

 

 

    

 

 

 

Total equity

     396,127     
  

 

 

    

 

 

 

Total capitalization

   $ 3,921,121      $    
  

 

 

    

 

 

 

 

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DILUTION

If you invest in shares of our Class A common stock, your investment will be immediately diluted to the extent of the difference between the initial public offering price per share of Class A common stock and the pro forma net tangible book value per share of Class A common stock after this offering. Dilution results from the fact that the per share offering price of the shares of Class A common stock is substantially in excess of the pro forma net tangible book value per share attributable to our existing owners.

As of September 30, 2018, we had a pro forma net tangible book value of $        , or $        per share of our Class A common stock. Pro forma net tangible book value represents the amount of total tangible assets less total liabilities, and pro forma net tangible book value per share of Class A common stock represents pro forma net tangible book value divided by the number of shares of Class A common stock outstanding, after giving effect to the Reorganization Transactions and assuming that all of the holders of LLC Units in Exeter Finance LLC (other than Exeter Finance Corporation) exchanged their LLC Units for newly-issued shares of Class A common stock on a one-for-one basis.

After giving effect to the sale of                  shares of Class A common stock in this offering at the initial public offering price per share of $        , the midpoint of the range set forth on the cover page of this prospectus, the application of the net proceeds, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us and the other transactions described under “Organizational Structure” and “Unaudited Pro Forma Consolidated Financial Information” and assuming that all of our existing owners exchanged their LLC Units (together with the same number of shares of our Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis, our pro forma net tangible book value as of                 , would have been $        , or $        per share of Class A common stock. This represents an immediate increase in net tangible book value of $        per share of Class A common stock to our existing owners and an immediate dilution in net tangible book value of $        per share of Class A common stock to investors in this offering.

 

Assumed initial public offering price per share of Class A common stock

      $                

Pro forma net tangible book value per share of Class A common stock as of

     

Increase in pro forma net tangible book value per share of Class A common stock attributable to new investors

                      
  

 

 

    

Pro forma net tangible book value per share of Class A common stock after this offering

     
     

 

 

 

Dilution per share of Class A common stock to new investors in this offering

      $    
     

 

 

 

The pro forma information discussed above is for illustrative purposes only. Our net tangible book value following the completion of the offering is subject to adjustment based on the actual offering price of our Class A common stock and other terms of this offering determined at pricing.

We have presented dilution in pro forma net tangible book value per share of Class A common stock to investors in this offering assuming that all of the holders of LLC Units redeemed or exchanged their LLC Units for a corresponding number of newly-issued shares of Class A common stock on a one-for-one basis in order to more meaningfully present the dilutive impact on the investors in this offering.

 

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The following table summarizes, on a pro forma basis after giving effect to the Reorganization Transaction and this offering, and the application of the net proceeds as described under “Use of Proceeds,” the total number of shares of Class A common stock purchased from us, the total cash consideration paid to us and the average price per share paid by our existing investors and by new investors purchasing shares in this offering.

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
     Number      Percent     Amount      Percent  

Existing stockholders

               $                 $                

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

                         100   $                      100   $    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The foregoing tables assume no exercise of the underwriters’ option to purchase additional shares of Class A common stock, solely to cover over-allotments, if any. If the underwriters exercise their option to purchase additional shares of our Class A common stock, there will be further dilution to new investors.

If the underwriters’ option to purchase additional shares to cover over-allotments, if any, is exercised in full, assuming that all of the existing owners exchanged their LLC Units (together with the same number of shares of our Class B common stock) for newly-issued shares of Class A common stock on a one-for-one basis, the number of shares of Class A common stock held by our existing owners would be                 , or     %, and the number of shares of Class A common stock held by new investors would increase to                 , or     %, of the total number of shares of our Class A common stock outstanding after this offering, respectively.

The number of shares of our Class A common stock set forth above is based on                  shares of our Class A common stock outstanding and                 LLC units outstanding and does not reflect                  shares of Class A common stock reserved for issuance pursuant to equity compensation plans.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma condensed consolidated balance sheet as of September 30, 2018 and the unaudited pro forma condensed consolidated statements of operations for the nine months ended September 30, 2018 and the year ended December 31, 2017 present our consolidated financial position and results of operations after giving effect to:

 

   

The Reorganization Transactions described under “Organizational Structure,” including the recording of a provision for federal and state corporate income taxes based on the income of Exeter Finance Corporation;

 

   

The creation of certain tax assets in connection with this offering and the Reorganization Transactions;

 

   

The creation of related party liabilities in connection with entering into the Tax Receivable Agreement with the TRA Parties, described under “Certain Relationships and Related Party TransactionsTax Receivable Agreement;” and

 

   

The sale by us of shares of Class A common stock pursuant to this offering and the application of the proceeds from this offering as described in “Use of Proceeds,” based on an assumed initial public offering price of $         per share, (which is the midpoint of the range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering.

The following pro forma balance sheet as of September 30, 2018 and statements of operations for the year ended December 31, 2017 and the nine months ended September 30, 2018, present the consolidated financial position and consolidated results of operations to give pro forma effect to the transactions identified above as if all such events had been completed as of September 30, 2018, with respect to the unaudited pro forma consolidated balance sheet and as of January 1, 2017 with respect to the unaudited pro forma consolidated statement of operations.

The unaudited pro forma condensed consolidated financial information has been prepared based on the historical financial statements of Exeter Finance LLC and the assumptions and adjustments described in the notes to the unaudited pro forma financial information below. The adjustments necessary to fairly present the unaudited pro forma financial information has been based on available information and assumptions we believe are reasonable and are presented for illustrative purposes only. The unaudited pro forma financial information does not purport to represent the condensed consolidated results of operations or consolidated financial position of Exeter Finance LLC that would actually have occurred had the transactions referred to above been consummated on the dates assumed or to project the condensed consolidated results of operations or consolidated financial position of Exeter Finance LLC for any future date or period. The presentation of the unaudited pro forma financial information is prepared in conformity with Article 11 of Regulation S-X.

The historical financial information of Exeter Finance LLC has been derived from the condensed consolidated financial statements and accompanying notes included elsewhere in this prospectus.

For purposes of the unaudited pro forma financial information, we have assumed that                  shares of Class A common stock will be issued by us at a price per share equal to the midpoint of the range set forth on the cover page of this prospectus, and as a result, immediately following the completion of this offering, the ownership percentage represented by LLC Units not held by us will be     %, and the net income attributable to LLC Units not held by us will accordingly represent     % of our net income. The higher percentage of net income attributable to LLC Units not held by us over the ownership percentage of LLC Units not held by us is due to the recognition of additional current income tax expense after giving effect to the adjustments for the reorganization transactions and this offering that is entirely attributable to Exeter Finance Corporation’s interest in Exeter Finance LLC. If the underwriters’ option to purchase additional shares of Class A common stock is exercised in full, the ownership percentage represented by LLC Units not held by us will be     %, and the net income

 

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attributable to LLC Units not held by us will accordingly represent     % of our net income. The unaudited pro forma condensed consolidated financial information presented assumes no exercise by the underwriters of the option to purchase up to an additional                  shares of Class A common stock from us.

We will incur certain one-time costs in connection with this offering and related reorganization transactions, such as accounting, tax, legal and other professional service costs, of approximately $        . We have included a pro forma adjustment for the removal of such incremental one-time costs of $        million, which are reflected in our interim condensed consolidated results of operations for the nine months ended September 30, 2018 of Exeter Finance LLC. We have not included any pro forma adjustments in the unaudited pro forma condensed consolidated results of operations for the remainder of these costs because they are not expected to have an ongoing impact on our operating results or are not factually supportable. Additionally, following the offering, we will incur costs associated with being a U.S. publicly traded company. Such costs will include new or increased expenses for such items as insurance, directors’ fees, accounting work, legal advice and compliance with applicable U.S. regulatory and stock exchange requirements, including costs associated with compliance with the Sarbanes-Oxley Act and periodic or current reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). No pro forma adjustments have been made to reflect such costs due to the fact that they currently are not objectively determinable.

 

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The unaudited pro forma condensed consolidated financial statements and related notes should be read in conjunction with the information contained in “Organizational Structure,” “Use of Proceeds,” “Capitalization,” “Selected Condensed Consolidated Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the condensed consolidated financial statements of Exeter Finance LLC and related notes thereto included elsewhere in this prospectus.

 

     Nine Months Ended September 30, 2018  
     Historical     Pro Forma  

($ thousands, except share-related amounts)

   Exeter Finance
LLC
    Adjustments     Exeter Finance
Corporation
 
     (unaudited)           (unaudited)  

Interest on loan receivables

   $ 558,190     $                   $                

Gain on sale of loan receivables

     13,704      

Fee and other income

     8,119      
  

 

 

   

 

 

   

 

 

 

Total interest, fee and other income

     580,013      

Interest expense

     122,021      
  

 

 

   

 

 

   

 

 

 

Net interest, fee and other income

     457,992      

Provision for credit losses

     275,338      
  

 

 

   

 

 

   

 

 

 

Net interest, fee and other income after provision for credit losses

     182,654      
  

 

 

   

 

 

   

 

 

 

Salaries and employee benefits

     74,566      

Other operating expenses

     40,616                     (a)    

Depreciation and amortization

     10,102      

Restructuring income

     (12    
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     125,272      
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     57,382      

Provision for income taxes

     —                       (b)    
  

 

 

   

 

 

   

 

 

 

Net income

     57,382      

Net income attributable to non-controlling interests

     —                       (c)    
  

 

 

   

 

 

   

 

 

 

Net income attributable to Exeter Finance

   $ 57,382     $       $    
  

 

 

   

 

 

   

 

 

 

Pro forma net income attributable to Exeter Finance per share:

                       (d)  

Basic

       $                
  

 

 

   

 

 

   

 

 

 

Diluted

       $                
  

 

 

   

 

 

   

 

 

 

Pro forma number of shares used in computing net income attributable to Exeter Finance per share:

                       (d)  

Basic

      
      

 

 

 

Diluted

      
      

 

 

 

 

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     Year Ended December 31, 2017  
     Historical     Pro Forma  

($ thousands, except share-related amounts)

   Exeter
Finance LLC
    Adjustments      Exeter
Finance
Corporation
 
                  (unaudited)  

Interest on loan receivables

   $ 627,185     $                    $                

Gain on sale of loan receivables

     5,343       

Fee and other income

     6,974       
  

 

 

   

 

 

    

 

 

 

Total interest, fee and other income

     639,502       

Interest expense

     142,840       
  

 

 

   

 

 

    

 

 

 

Net interest, fee and other income

     496,662       

Provision for credit losses

     294,253       
  

 

 

   

 

 

    

 

 

 

Net interest, fee and other income after provision for credit losses

     202,409       
  

 

 

   

 

 

    

 

 

 

Salaries and employee benefits

     92,418       

Other operating expenses

     50,489       

Depreciation and amortization

     14,239       

Restructuring income

     (63     
  

 

 

   

 

 

    

 

 

 

Total operating expenses

     157,083       
  

 

 

   

 

 

    

 

 

 

Income before income taxes

     45,326                                          

Provision for income taxes

     —                       (b)    
  

 

 

   

 

 

    

 

 

 

Net income

     45,326       

Net income attributable to non-controlling interests

     —                       (c)     
  

 

 

   

 

 

    

 

 

 

Net income attributable to Exeter Finance

   $ 45,326     $        $    
  

 

 

   

 

 

    

 

 

 

Pro forma earnings per share:

                                         (d)  
       

Basic

        $                
       

 

 

 

Diluted

        $                
       

 

 

 

Pro forma number of shares used in computing earnings per share:

                                         (d)  

Basic

       
       

 

 

 

Diluted

       
       

 

 

 

 

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     As of September 30, 2018  
     Historical      Pro Forma  

($ thousands, except share-related amounts)

   Exeter
Finance LLC
     Adjustments     Exeter
Finance
Corporation
 
     (unaudited)            (unaudited)  

Assets:

       

Cash and cash equivalents

   $ 17,714      $       $                

Restricted cash and cash equivalents

     283,690       

Loan receivables, net

     3,545,329       

Repossessed vehicle inventory and other assets, net

     103,200                      (e)    

Property and equipment, net of accumulated depreciation and amortization

     17,183       

Warehouse facility debt issuance costs, net

     7,688       

Deferred tax asset

     —                        (f)    
  

 

 

    

 

 

   

 

 

 

Total Assets

   $ 3,974,804      $       $    
  

 

 

    

 

 

   

 

 

 

Liabilities:

       

Accounts payable

   $ 3,236      $       $    

Accrued liabilities

     45,122                      (g)    

Deferred rent

     5,325       

Warehouse facility

     354,600       

Senior note, net

     175,000       

Securitization notes payable, net

     2,995,394       

Payable to related parties pursuant to tax receivable agreement

     —                        (h)    
  

 

 

    

 

 

   

 

 

 

Total Liabilities

     3,578,677       
  

 

 

    

 

 

   

 

 

 

Equity:

       

Member’s equity

     396,127                      (i,j)    

Preferred stock, $0.0001 par value,         shares authorized, none issued and outstanding

     —         

Class A common stock, $0.0001 par value,         shares authorized,         issued and outstanding

     —                        (i,k)    

Class B common stock, $0.0001 par value,         shares authorized,         issued and outstanding

     —                        (i,k)   

Additional paid-in capital

     —                        (i,j)    

Retained earnings

     —                        (m)   

Non-controlling interests

     —                        (i,l,m)    
  

 

 

    

 

 

   

 

 

 

Total Equity

     396,127       
  

 

 

    

 

 

   

 

 

 

Total Liabilities and Equity

   $ 3,974,804      $       $                
  

 

 

    

 

 

   

 

 

 

 

(a)

Represents the removal of incremental one-time costs of $         million for professional service fees, such as legal and accounting fees, in connection with the offering and related reorganization transactions and related tax effect, which are reflected in the interim condensed consolidated results of operations for the nine months ended September 30, 2018 of Exeter Finance LLC.

(b)

Following the Reorganization Transactions, we will be subject to U.S. federal income taxes, in addition to state and local taxes, with respect to our allocable share of any net taxable income of Exeter Finance LLC, which will result in higher income taxes. As a result, the pro forma statements of income reflect an adjustment to our provision for corporate income taxes to reflect an effective rate of     %, which includes provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction.

(c)

Exeter Finance LLC has been, and will continue to be, treated as a flow-through entity for federal and most state income tax purposes. As such, Exeter Finance LLC’s profits and losses will flow through to its partners, including us, and are generally not subject to tax at the Exeter Finance LLC level. Upon completion of the Reorganization Transactions, we will become the sole managing member of Exeter

 

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  Finance LLC. As a result of this offering, we will initially own approximately     % of the economic interest of Exeter Finance LLC, but will have 100% of the voting power and will control the management of Exeter Finance LLC. Immediately following the completion of this offering, the ownership percentage held by the non-controlling interest will be     %.
(d)

The basic and diluted pro forma net income per share of Class A common stock represents net income attributable to Exeter Finance Corporation divided by the combination of the                  shares owned by existing owners and the                Class A common shares sold in this offering, the proceeds of which are expected to equal $        million (based on the midpoint of the price range shown on the cover of this prospectus, after deducting underwriting discounts). See “Use of Proceeds.” The table below presents the computation of pro forma basic and dilutive earnings per share (“EPS”) for Exeter Finance Corporation.

 

Earnings per Common Share ($ thousands, except share-related amounts)    Nine Months Ended
September 30, 2018
     Year Ended
December 31, 2017
 

Numerator:

     

Net income attributable to Exeter Finance—basic and diluted

   $                    $                    
  

 

 

    

 

 

 

Denominator:

     

Weighted average common shares outstanding—basic

     

Incremental common shares attributable to dilutive instruments

     
  

 

 

    

 

 

 

Weighted average common shares outstanding—diluted

     
  

 

 

    

 

 

 

Basic earnings per share

   $        $    
  

 

 

    

 

 

 

Diluted earnings per share

   $        $                
  

 

 

    

 

 

 

 

(e)

Represents the removal of the asset related to capitalized incremental one-time costs of $             million for professional service fees, such as legal and accounting fees, in connection with the offering as of September 30, 2018.

(f)

Exeter Finance Corporation is a corporation for U.S. federal and state income tax purposes. Exeter Finance LLC was and will continue to be treated as a partnership for U.S. federal income tax purposes, and as such, is generally not subject to U.S. federal income tax at the entity level. Furthermore, deferred tax assets and liabilities will be recognized by Exeter Finance Corporation for the future tax consequences attributable to differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The pro forma deferred tax asset balance shown for Exeter Finance Corporation includes the applicable deferred tax assets under the terms of the Tax Receivable Agreement that we will enter into with the TRA Parties immediately prior to this offering.

(g)

Represents the estimated incremental one-time costs of $             million for professional service fees, such as legal and accounting fees, in connection with the offering and related reorganization transactions not reflected in the condensed consolidated balance sheet as of September 30, 2018. The Company recorded an adjustment to accrued liabilities with a corresponding decrease in additional paid-in capital to reflect the professional service fees we estimate to incur.

(h)

Reflects the recognition of a liability of $         million, which represents 85% of the full obligation for applicable tax attributes under the terms of the Tax Receivable Agreement that we will enter into with the TRA Parties immediately prior to this offering. See “Certain Relationships and Related Party Transactions-Tax Receivable Agreement.” No adjustment has been made to reflect future exchanges by the Continuing LLC Owners of their LLC Units (and Class B common stock) for shares of our Class A common stock or cash.

(i)

Represents an adjustment to equity reflecting (i) par value for common stock, (ii) a decrease in $        million of members’ equity to allocate a portion of Exeter Finance Corporation’s equity to the non-controlling interests, and (iii) reclassification of members’ equity of $        million to additional paid-in capital.

 

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(j)

Reflects adjustments to additional paid-in capital as follows:

 

Pro Forma Additional Paid-In Capital

($ thousands)

  As of
September 30,
2018
 

Reclassification of historical members equity (see (i) above)

  $                

Shares of common stock issued in this offering

 

Net adjustment to reflect the deferred tax asset and liability under the TRA

 

Adjustment to reflect nonrecurring professional fees prior to the offering

 
 

 

 

 

Pro forma additional paid-in capital

  $    
 

 

 

 

The amount shown for the issuance of shares of common stock in this offering is at an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

(k)

Reflects the issuance of shares of common stock in this offering at $0.0001 par value per share.

(l)

As described in “Organizational Structure,” Exeter Finance Corporation will become the sole managing member of Exeter Finance LLC. Exeter Finance Corporation will initially have a minority economic interest in Exeter Finance LLC, but will have 100% of the voting power and control over the management of Exeter Finance LLC. As a result, we will consolidate the financial results of Exeter Finance LLC and will record an amount as non-controlling interests on our condensed consolidated balance sheet.

(m)

Reflects the incremental one-time equity-based charge from the modification of PIUs granted to existing and former employees in connection with the unitization.

 

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SELECTED HISTORICAL FINANCIAL DATA

The following table shows selected historical condensed consolidated financial and other data of Exeter Finance LLC at the dates and for the periods indicated. Exeter Finance LLC is considered our predecessor for accounting purposes, and its historical condensed consolidated financial statements will be our historical condensed consolidated financial statements following this offering.

The selected consolidated statements of operations data for each of the years ended December 31, 2017, 2016 and 2015, and the selected consolidated balance sheets data as of December 31, 2017 and 2016, were derived from, and are qualified by reference to, the audited consolidated financial statements of Exeter Finance LLC which operated as Exeter Finance Corp., a Texas corporation, prior to May 1, 2017, included elsewhere in this prospectus. The selected consolidated statements of operations data for each of the years ended December 31, 2015, 2014 and 2013, and the selected consolidated balance sheets data as of December 31, 2015, 2014 and 2013, were derived from the consolidated financial statements of Exeter Finance LLC not included in this prospectus.

The selected condensed consolidated statements of operations data for the nine months ended September 30, 2018 and 2017 and the selected condensed consolidated balance sheets data as of September 30, 2018 and 2017 were derived from, and are qualified by reference to, the unaudited condensed consolidated financial statements of Exeter Finance LLC included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on a consistent basis with the audited consolidated financial statements of Exeter Finance LLC. Such unaudited financial statements contain all adjustments of a normal, recurring nature that are, in the opinion of management, necessary for a fair statement of the financial information set forth in those statements. Our results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year. Further, our historical results are not necessarily indicative of our results in any future period.

The selected condensed consolidated financial data of Exeter Finance Corporation have not been presented because Exeter Finance Corporation is a newly incorporated entity and has not engaged in any business or other activities except in connection with its formation and initial capitalization.

 

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You should read the following financial information together with the information under “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the condensed consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     September 30,  
($ thousands)    2018     2017  
     (unaudited)  

Statements of Operations Data

    

Net interest, fee and other income

   $ 457,992     $ 373,600  

Provision for credit losses

     275,338       241,594  

Operating expenses

     125,272       119,858  

Provision for income taxes

     —         —    
  

 

 

   

 

 

 

Net income

   $ 57,382     $ 12,148  
  

 

 

   

 

 

 

Balance Sheets Data

    

Loan receivables, net

   $ 3,545,329     $ 3,028,534  

Total assets

     3,974,804       3,409,497  

Securitization notes payable, net

     2,995,394       2,772,700  

Other debt

     529,600       234,039  

Accounts payable, accrued liabilities, deferred rent

     53,683       36,295  

Total liabilities

     3,578,677       3,043,034  

Total equity

     396,127       366,463  

Ratios(b)

    

Return on average assets

     2.06     0.49

Return on average equity

     19.21     4.58

Net interest, fee and other income as a % of AGR

     16.94     15.57

Provision for credit losses as a % of AGR

     10.18     10.07

Operating expenses as a % of AGR

     4.63     5.00

Income tax expense as a % of AGR

     —       —  

Net income as a % of AGR

     2.12     0.51

Other Information

    

Average gross receivables (AGR)

   $ 3,615,030     $ 3,207,472  

Debt to equity ratio

     8.90x       8.20x  

Employees

     1,054       958  

 

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     Years Ended December 31,  
($ thousands)    2017(a)     2016     2015     2014     2013  

Statements of Operations Data

          

Net interest, fee and other income

   $ 496,662     $ 452,917     $ 461,549     $ 364,922     $ 234,705  

Provision for credit losses

     294,253       266,700       311,315       262,889       159,836  

Operating expenses

     157,083       155,123       159,356       143,033       118,387  

Provision for (benefit from) income tax expense

     —         1,617       8,268       (5,016     8,052  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 45,326     $ 29,477     $ (17,390   $ (35,984   $ (51,570
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance Sheets Data

          

Loan receivables, net

   $ 2,979,219     $ 2,769,781     $ 2,837,727     $ 2,619,591     $ 1,779,789  

Total assets

     3,355,732       3,153,844       3,217,228       2,969,786       1,975,008  

Securitization notes payable, net

     2,437,208       2,262,694       2,275,021       1,972,784       1,038,182  

Other debt

     479,755       505,914       586,431       657,289       659,874  

Accounts payable, accrued liabilities, deferred rent

     42,904       36,990       37,006       33,128       29,355  

Total liabilities

     2,959,867       2,805,598       2,898,458       2,663,201       1,727,411  

Total equity

     395,865       348,246       318,770       306,585       247,597  

Ratios

          

Return on average assets

     1.36     0.94     (0.55 )%      (1.43 )%      (3.65 )% 

Return on average equity

     12.53     9.32     (5.57 )%      (12.80 )%      (26.21 )% 

Net interest, fee and other income as a % of AGR

     15.34     14.75     15.17     15.27     17.54

Provision for credit losses as a % of AGR

     9.09     8.68     10.23     11.00     11.95

Operating expenses as a % of AGR

     4.85     5.05     5.24     5.98     8.85

Income tax expense (benefit) as a % of AGR

     —       0.05     0.27     (0.21 )%      0.60

Net income (loss) as a % of AGR

     1.40     0.96     (0.57 )%      (1.51 )%      (3.85 )% 

Other Information

          

Average gross receivables (AGR)

   $ 3,237,218     $ 3,070,884     $ 3,042,055     $ 2,390,576     $ 1,338,003  

Debt to equity ratio

     7.37x       7.95x       8.98x       8.58x       6.86x  

Employees

     939       954       852       1,131       1,126  

 

(a)

On April 30, 2017, Exeter Finance Corp. converted from a Texas corporation to a Delaware limited liability company and changed its name to Exeter Finance LLC. Beginning May 1, 2017, Exeter Finance LLC is treated as a flow-through entity for income tax purposes and any taxable income or loss generated by Exeter Finance LLC is passed through to and reported by its indirect equity owners.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with the “Selected Historical Financial Data,” “Unaudited Pro Forma Financial Information” and the consolidated financial statements of Exeter Finance LLC and the accompanying notes included elsewhere in this prospectus. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results may differ materially from those contained in any forward-looking statements. These forward-looking statements involve numerous risks and uncertainties, including those discussed below and elsewhere in this prospectus including the sections entitled “Risk Factors” and “Forward-Looking Statements.” Due to rounding, percentages presented throughout the MD&A may not precisely reflect the absolute figures.

Our Company

We are an industry leading, full-service, technology and data-driven specialty finance company, operating in the U.S. automobile finance market since April 2006. Our business is to underwrite, purchase, service, and securitize retail installment contracts, which we refer to as either retail installment contracts or auto loans, from automobile dealers. We service auto loans that we own, as well as auto loans owned by third parties. Through our retail installment contract purchases, we provide indirect financing for new and used vehicles, primarily to consumers with FICO® Scores of less than 660, which we refer to as non-prime consumers, with a particular focus on consumers with FICO® Scores of less than 620, which we refer to as sub-prime consumers. We serve as a source of financing for automobile dealers, facilitating vehicle sales to consumers with non-prime, including sub-prime, FICO® Scores, and as such we provide financing to underserved consumers. We believe having a personal vehicle is mission-critical for many of these consumers, particularly in serving as a means of transportation for employment, therefore consumers prioritize re-paying these auto loans.

As of September 30, 2018, we had relationships with approximately 276,000 consumers and approximately 10,500 dealers across 49 states. We focus our automobile dealer marketing efforts across differentiated and diverse origination channels, each with attractive expected levels of risk-adjusted financial returns that we believe improve optionality in varying market environments.

We also have strong partnerships with select large dealer groups, OEM captive finance companies (“Captives”) and banks, and are currently seeking partnerships with Original Equipment Manufacturers (“OEMs”). These partnerships provide us broad and diverse access to profitable origination channels. Our core channels include franchise dealers, franchise dealer groups and independent used car dealers. Our strategic partnership channels consist of an independent dealer group partnership, captive partnerships and bank partnerships, and we are seeking partnerships with OEMs.

Items Affecting Comparability of Results

Our historical financial results may not be comparable, either from period to period or to our future financial results, due to a number of factors, including our LLC Conversion, our reorganization in connection with this offering and the items discussed below:

Income taxes:

 

   

April 30, 2017 LLC Conversion: On April 30, 2017, Exeter Finance Corp. converted from a Texas corporation to a Delaware limited liability company and changed its name to Exeter Finance LLC which we refer to as our “LLC Conversion.” Beginning May 1, 2017, Exeter Finance LLC has been treated as a flow-through entity for income tax purposes and any taxable income or loss generated by Exeter Finance LLC is passed through to and reported by its indirect equity owners.

 

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IPO Reorganization and Corporate Structure: Exeter Finance Corporation is a corporation for U.S. federal and state income tax purposes. Our accounting predecessor, Exeter Finance LLC, was and is treated as a flow-through entity for U.S. federal income tax purposes, and as such, has generally not been subject to U.S. federal income tax at the entity level. Accordingly, unless otherwise specified, the historical results of operations and other financial information set forth in this prospectus do not include any provision for U.S. federal income tax or income taxes in any state or locality (other than franchise tax in the State of Texas). Following this offering, Exeter Finance Corporation will pay federal income taxes as a corporation on its share of our taxable income.

Furthermore, as a result of the Reorganization Transactions and this offering deferred tax assets and liabilities will be recognized by Exeter Finance Corporation for the future tax consequences attributable to differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that included the enactment date, as applicable.

In addition, in connection with the Reorganization Transactions and this offering we will enter into the Tax Receivable Agreement as described under “Certain Relationships and Related Party Transactions-Tax Receivable Agreement.

Tax Reform Act: Prior to the December 2017 Public Law 115-97 “Tax Cuts and Jobs Act of 2017” or “Tax Reform Act,” and our LLC Conversion discussed above, Exeter Finance Corp. was subject to U.S. federal income taxes at a statutory rate of 35%. Following the December 2017 passage of the Tax Reform Act, the U.S. federal corporate income tax rate was reduced from 35% to 21%. The historical provision for income taxes of Exeter Finance Corp. is not comparable to the anticipated provision for income taxes of Exeter Finance Corporation in periods following this offering, both as a result of the Tax Reform Act and because Exeter Finance Corporation will not initially own 100% of Exeter Finance LLC and will only pay taxes on its share of our taxable income.

Management compensation plans: At or prior to the completion of this offering, we will adopt the Exeter Finance Corporation 2018 Omnibus Incentive Compensation Plan (“Omnibus Incentive Plan”) as more fully discussed in “Compensation Discussion and Analysis.” In periods following this offering, we expect our results of operations will reflect compensation expense related to awards made under the New Incentive Plan. In addition, we expect an incremental one-time equity based compensation expense from the modification of PIUs granted to former employees in connection with the unitization. See note (k) to the “Unaudited Pro Forma Financial Information.”

New Accounting Standard for measuring credit losses: In June of 2016, the Financial Accounting Standards Board issued Accounting Standard Update ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the way that entities will be required to measure credit losses. The new standard requires that the estimated credit loss be based upon an “expected credit loss” approach rather than the “incurred loss” approach currently required. The new approach will require entities to measure all expected credit losses for financial assets based on historical experience, current conditions and reasonable forecasts of collectability. This will change the current incurred loss method of providing allowances for credit losses that are probable over the next twelve months to an expected lifetime loss method, which we expect will require us to increase our allowance for credit losses, and will likely increase the data we would need to collect and review to determine the appropriate level of the allowance for credit losses. This ASU will become effective for our fiscal years beginning January 1, 2020, with early adoption permitted for fiscal years beginning January 1, 2019. See Note 1 of the Notes to the Consolidated Financial Statements included in this prospectus for more information on this new accounting standard.

 

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Public company costs: Following the completion of this offering, we expect to incur additional costs associated with operating as a public company. We expect that these costs will include additional personnel, legal, consulting, regulatory, insurance, accounting, investor relations and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules adopted by the SEC and national securities exchanges, requires public companies to implement specified corporate governance practices that are currently inapplicable to us as a private company. These additional rules and regulations will increase our legal, regulatory and financial compliance costs and will make some activities more time-consuming and costly.

Recent Company Initiatives

Branch office consolidation and centralization: From our 2006 inception through April 2015, we acquired retail installment contracts through branch offices and centralized buying centers. In January 2015, we announced the closure of our branch offices and began to originate and service all retail installment contracts through our two centralized buying centers, located in Irving, Texas and Clearfield, Utah. In addition, certain back office servicing operations were outsourced to lower cost third party vendors. The branch office consolidation supported our efforts to provide after hours and weekend dealer support while improving overall operating efficiency and processing control. The restructuring was implemented in phases and completed in April 2015. Exeter incurred a total restructuring expense of approximately $6.8 million in 2015.

Risk-adjusted financial returns strategy: As realized charge-offs on 2015 vintage loan originations began to exceed our loss expectations, our new management team transitioned from a top line revenue strategy to a strategy more focused on profitability. We proactively reduced 2016 new loan origination volume to focus on generating appropriate risk-adjusted financial returns by optimizing pricing and terms across credit tiers and identifying dealers that demonstrated superior performance with Exeter related to retail installment contract credit performance, new loan volume, and origination efficiency.

As a result, we implemented a dealer performance improvement initiative within our Core Channel. We also focused on improving our internal processes to increase pricing and origination efficiency including automation of manual processes, investing in employee training, and tightening deal structures while improving our risk-based pricing models.

These strategic actions have resulted in improved relative credit performance on new 2016 and later vintage year loan originations and positioned Exeter to take advantage of market opportunities, including: (i) new partnerships with OEMs, Captives and bank partners; and (ii) core dealer origination growth resulting from two large national financial institutions reducing their non-prime originations beginning in the first quarter of 2016. These factors supported our strategy to create multiple broad and diverse origination channels.

Factors Impacting Our Business Performance

We believe that our performance and future success depend on a number of factors, including those discussed below and in the section titled “Risk Factors” of this prospectus.

 

   

Phasing-in of improved vintage economics: As legacy vintages that were originated prior to the launch of our new strategy in early 2016 mature or are repaid, our portfolio is being replenished with more recent origination vintages anticipated to be more profitable, providing meaningful incremental earnings growth as the portfolio turns over. For instance, for the nine months ended September 30, 2018 and 2017, our yield on loan receivables was 20.64% and 19.81%, respectively, and for the years ended December 31, 2017, 2016 and 2015, our yield on loan receivables was 19.37%, 18.55%, and 18.42%, respectively.

 

   

Origination volume growth: We believe there is potential for balance sheet growth through the expansion of our core dealer base and dealer group program, coupled with the continued expansion of our partnership programs. We also believe our large addressable market and the fragmented nature of

 

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the industry provide meaningful opportunity for continued growth. Exeter’s market share of outstanding sub-prime retail installment contracts was 2.8%, according to J.D. Power and Associates’ Power Information Network PIN as of September 30, 2018.

 

   

Platform scalability: Our incremental operating leverage is driven by: (i) operating discipline; (ii) system and process enhancements; (iii) continued emphasis on growth of cost-efficient partnerships; and (iv) portfolio growth. We believe our platform can support growth of the portfolio without significant incremental corporate and system infrastructure costs.

 

   

Competition: The automobile finance industry is highly competitive. We compete on the pricing and terms we offer on retail installment contract purchases as well as the consumer service and funding stability we provide to our automobile dealers. Certain large competitors who exited the market may reenter and increase our competition. In addition, from time to time we have seen irrational pricing from competitors which we may see in the future as well.

 

   

Macroeconomic conditions: Our business and financial performance are affected by national, regional, and local economic conditions primarily in the United States, as well as the perception of those conditions and future economic prospects. Unemployment rates, personal consumption rates, consumer confidence and price indices, energy prices, used vehicle prices, and industrial production indices may all impact our performance.

We believe that new retail installment contract origination activity is impacted by the level of new and used vehicle purchases that is typically led by economic growth reflected by improving employment rates and consumer confidence, while consumer loan defaults generally increase during periods of rising unemployment and declining industrial production.

 

   

Automobile OEM industry conditions: We believe that trends within the automobile OEM industry impact our financial performance in two ways: (i) new retail installment contract originations are impacted by the comparative affordability of new and used vehicles; and (ii) recoveries on repossessed vehicles are impacted by the strength of vehicle auction prices.

 

   

Seasonality and resulting fluctuations in operating results: Our business experiences seasonality fluctuations in the results of our operations and cash flow needs throughout the year. We generally see higher volume and favorable collection and loss trends late in the first quarter and early in the second quarter due to consumers receiving refunds from tax returns. However, during the second half of the year, our consumers generally have less cash available and we see credit losses increase from the first half of the year.

How We Assess Our Business Performance

In addition to net income (loss), the following are key measures that we use to assess the performance of our business overall and on an origination month vintage basis. We compare these key measures to prior periods, our annual plan, industry peers, and any current business forecasts.

Retail installment contract origination volume: New retail installment contract origination volume and portfolio size determines the magnitude of the components of interest income and costs of funds on our earnings. We closely monitor new origination volume along with APR, forecasted net credit losses, term, and discounts on the retail installment contracts acquired to ensure we are earning an appropriate risk-adjusted return. We also monitor portfolio runoff, including defaults, principal amortization, and prepayments of existing loans versus expectations and prior periods to adjust our forecast of expected portfolio financial results and adjust our pricing on new originations as necessary.

Net interest margin: We monitor the spread between the interest, fees, and other income earned on our loan receivables and the interest expense incurred on our liabilities, and continually monitor the components of our interest income and cost of funds. We also monitor external interest rate and credit spread trends, including the swap curve, LIBOR and commercial paper rates, spot and forward rates, and observable market credit spreads.

 

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Net credit losses: Each of the retail installment contracts purchased is priced using our risk-based proprietary models. The profitability of a retail installment contract is directly related to whether or not the actual net credit losses are consistent with forecasted losses at origination. We closely analyze monthly credit performance of a retail installment contract on an origination vintage basis over its life to identify variances to our original forecasted net credit loss that may cause adjustment to our business practices or anticipated future loss expectations. We also monitor recovery rates, both industry-wide and our own experience, because recoveries impact the severity of our credit losses. Because delinquencies are an early indicator of future net credit losses, we analyze delinquency trends and early payment and cash flow metrics, on an origination month vintage basis, to determine whether or not retail installment contracts acquired are performing in line with our original estimate of each origination vintage acquired.

Operating expenses: We perform fluctuation and variance analysis on cost and expense levels that might indicate a trend or the impact of large initiatives. Our cost and expense analysis includes trending of cost per loan to originate and service the loan, and key productivity measures, including return on assets and expense as a percentage of average gross receivables and average managed receivables, and how each compares to expectations.

New Loan Originations and Portfolio Balances

New Loan Originations

The table below presents a summary of new loan originations.

 

New Loan Originations    Nine Months Ended
September 30,
    Years Ended December 31,  
($ thousands)    2018     2017     2017     2016     2015  

Origination Channels:

          

Core Channels

   $ 1,094,737     $ 971,737     $ 1,226,403     $ 960,029     $ 1,023,848  

Strategic Partnership Channels

     670,393       354,308       480,328       298,040       543,394  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Retail installment contract gross receivable originations

   $ 1,765,130     $ 1,326,045     $ 1,706,731     $ 1,258,069     $ 1,567,242  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average loan size at origination ($ dollars)

   $ 17,810     $ 17,174     $ 17,196     $ 17,727     $ 18,690  

Number of new loans

     99,107       77,211       99,250       70,968       83,853  

Weighted average at origination:

          

Annual percentage rate (APR)

     21.82     21.63     21.75     20.78     19.78

FICO (a)

     568       569       569       575       574  

Deferred fees/discount

     3.41     3.83     3.97     3.18     2.88

Original term (months)

     69.5 mo       69.6 mo       69.6 mo       69.8 mo       70.2 mo  

 

(a)

Excludes new retail installment contract originations for consumers with zero FICO® Scores. A consumer may have a zero FICO® Score due to a limited credit history.

Nine Months Ended September 30, 2018 and 2017: Gross receivable originations increased $439.1 million, or 33.1%, primarily driven by increases of $123.0 million from our Core Channels and $316.1 million from our Strategic Partnership Channels.

Years Ended December 31, 2017 and 2016: Gross receivable originations increased $448.7 million, or 35.7%, primarily driven by increases of $266.4 million from our Core Channels and $182.3 million from our Strategic Partnership Channels. The improvement in 2017 retail installment contract originations reflected our risk-adjusted financial returns strategy to optimize pricing and terms across credit tiers and identify dealers that demonstrated superior performance.

 

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Years Ended December 31, 2016 and 2015: Gross receivable originations decreased $309.2 million, or 19.7%. In 2016, we proactively reduced new retail installment contract origination volumes to focus on generating appropriate risk-adjusted financial returns as discussed above.

Portfolio Balances

The table below presents the period end loan portfolio balances.

 

Loan Portfolio Balances    Nine Months Ended
September 30,
    Years Ended December 31,  
($ thousands)    2018     2017     2017     2016     2015  

Gross receivables (UPB)

   $ 3,879,110     $ 3,337,500     $ 3,264,820     $ 3,038,739     $ 3,128,711  

Average loan size ($ dollars)

     14,329       14,323       14,130       14,701       15,665  

Number of total loans

     270,708       233,014       231,062       206,708       199,722  

Weighted average during period:

          

Annual percentage rate (APR)

     21.13     20.41     20.59     19.72     19.13

Deferred fees/discount

     2.40     2.60     2.69     2.05     1.27

Original term (months)

     69.8 mo       69.9 mo       54.1 mo       69.9 mo       69.8 mo  

Nine Months Ended September 30, 2018 and 2017: Gross receivables increased $541.6 million, or 16.2%, driven by retail installment contract origination growth of $439.1 million partially offset by the sale of loan receivables of $270.2 million from our servicing-retained forward flow sale agreement with an institutional investment group.

Years Ended December 31, 2017 and 2016: Gross receivables increased $226.1 million, or 7.4%, driven by 2017 retail installment contract origination growth of $448.7 million partially offset by the sale of loan receivables of $97.5 million to a third party.

Years Ended December 31, 2016 and 2015: Gross receivables decreased $90.0 million, or 2.9%, driven by our proactive reduction in 2016 retail installment contract originations to focus on generating appropriate risk-adjusted financial returns.

Select Components of Operating Results

Interest Income

We accrue interest on loans in accordance with their individual terms and conditions, discontinuing and writing-off accrued interest once a loan becomes more than 60 days past due and for loan accounts in repossession or bankruptcy. Payments received on non-accrual loans are first applied to interest due, then principal, then fees. Interest accrual resumes once an account has received payments bringing the loan delinquency status to less than 60 days past due. We accrete deferred fees and origination purchase discounts, offset by amortization of direct origination costs, as an adjustment to interest income using the interest method.

Gain on Sale of Loan Receivables

The sale of loan receivables to a third party that qualifies for derecognition accounting treatment in accordance with the applicable accounting guidance gives rise to a gain on sale to the extent cash proceeds received exceed the carrying value of the assets sold.

Fee and Other Income

Fee and other income primarily include fees and interest income on restricted cash balances. Fee income includes non-sufficient funds, late and other miscellaneous fees paid by the borrower. Interest income on cash balances represents earnings on cash, restricted cash, and cash equivalents primarily held by the Company’s securitization trusts.

 

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Interest Expense

Interest expense is incurred on our interest-bearing liabilities that consist of securitization notes payable, senior notes, and the warehouse facility. We also incur collateral custodial fees on unpledged loans outstanding that are included in other interest expenses. Collateral custodial fees are incurred based on loan count, not unpaid principal balance, for each specific service provided. Interest expense also includes amortization of deferred fees paid or expenses incurred as a result of obtaining our debt, which are amortized using the interest method over the term of the liabilities. Key drivers of interest expense include the debt amounts outstanding and undrawn, fees charged to securitization notes payable, the interest rate environment and its effect on interest rates paid on our funding sources, and the changing mix of our securitizations and other interest-bearing liabilities.

Provision for Credit Losses

Provision for credit losses is the expense required to maintain the allowance for credit losses at a level considered adequate by management to absorb estimated future loan portfolio credit losses over the loss emergence period of approximately twelve months. We continuously review and evaluate our loss forecasting methodology and models and, as needed, implement enhancements or changes to them. Our loan portfolio is assessed using proprietary, risk-based underwriting models that consider an applicant’s ability to repay the proposed loan and the expected recovery value in the event of default.

Net credit losses are realized gross loan principal charge-offs less recoveries, net of costs. Recoveries are directly impacted by auction prices for repossessed vehicles. Our estimate of future loan portfolio net credit losses is derived from our allowance methodology for determining the general allowance, and a discounted cash flow methodology for specific impairment on certain loans determined by the Company to be TDRs.

Lifetime expected future credit losses on TDR loans are considered as one of the factors in measuring impairment on the TDR loans and is recorded as a component of Loan receivables, net. Loans receivable, net are presented net of this specific impairment and the general allowance for credit losses. The specific impairment is determined using a discounted cash flow model to calculate the net realizable value of the TDR portfolio. The cash flow components of the Company’s discounted cash flow model include projections of lifetime principal, interest and fees collected, as well as recoveries on defaulted loans. Lifetime expected future credit losses are an implied component as an absence of cash flows and is a significant assumption used in determining the impairment on TDRs. The TDR population consists of loans with borrowers in Chapter 13 bankruptcy which have an interest rate or principal adjustment as part of a confirmed bankruptcy plan, and loans with borrowers that receive a more-than-minor loan modification defined as:

 

   

Creditor concession to borrower: For Chapter 13 bankrupt consumer accounts, a concession is considered granted when the plan terms (loan balance, rate payment, and remaining term) are confirmed with the bankruptcy court. For all other loans, a concession is defined as a loan that has received cumulative payment extensions, or other modifications, in an amount that totals 10% or more of the loan balance at the time of the most recent modification.

 

   

Borrower financial difficulties: A loan that subsequently goes into payment default (defined as greater than 60 days past due) as the result of being delinquent would be indicative of a debtor (borrower) experiencing financial difficulties.

When a borrower receives a material concession and experiences financial difficulties, we have determined that the loan will be classified as a TDR and subsequently impaired (represented by the specific allowance). In the event a loan is determined to be a TDR, the Company provides for this amount on a specific basis as opposed to the general allowance for credit losses.

The general allowance for credit losses is for estimated future credit losses on individually acquired loans not classified as TDR and are based on monthly origination vintage level lifetime loss expectations that are derived from historical experience.

 

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Consolidated Results of Operations

You should read this discussion of our consolidated results of operations in conjunction with our consolidated financial statements and accompanying notes.

 

Results of Operations Summary

   Nine Months Ended
September 30,
    Years Ended December 31,  
($ thousands, rates annualized)    2018     2017     2017     2016     2015  
     (unaudited)                    

Interest on loan receivables

   $ 558,190     $ 475,355     $ 627,185     $ 569,765     $ 560,234  

Gain on sale of loan receivables

     13,704       —         5,343       —         —    

Fee and other income

     8,119       4,772       6,974       12,205       11,736  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest, fee and other income

     580,013       480,127       639,502       581,970       571,970  

Interest expense

     122,021       106,527       142,840       129,053       110,421  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest, fee and other income

     457,992       373,600       496,662       452,917       461,549  

Provision for credit losses

     275,338       241,594       294,253       266,700       311,315  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest, fee and other income after provision for credit losses

     182,654       132,006       202,409       186,217       150,234  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Salaries and employee benefits

     74,566       70,476       92,418       84,583       83,274  

Other operating expenses

     40,616       38,607       50,489       55,671       55,974  

Depreciation and amortization

     10,102       10,837       14,239       15,046       13,312  

Restructuring (income) expense

     (12     (62     (63     (177     6,796  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     125,272       119,858       157,083       155,123       159,356  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     57,382       12,148       45,326       31,094       (9,122

Provision for income taxes

     —         —         —         1,617       8,268  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 57,382     $ 12,148     $ 45,326     $ 29,477     $ (17,390
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average gross receivables (AGR)

   $ 3,615,030     $ 3,207,472     $ 3,237,218     $ 3,070,884     $ 3,042,055  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) as a % of AGR

     2.12     0.51     1.40     0.96     (0.57 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Income

 

Interest Income Summary

   Nine Months Ended
September 30,
    Years Ended December 31,  
($ thousands, rates annualized)    2018     2017     2017     2016     2015  
     (unaudited)                    

Finance charge income

   $ 541,779     $ 463,355     $ 610,709     $ 566,318     $ 551,546  

Accretion of deferred fees, net

     16,411       12,000       16,476       3,447       8,688  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

   $ 558,190     $ 475,355     $ 627,185     $ 569,765     $ 560,234  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average gross receivables (AGR)

   $ 3,615,030     $ 3,207,472     $ 3,237,218     $ 3,070,884     $ 3,042,055  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Yield on loan receivables % rate

     20.64     19.81     19.37     18.55     18.42
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2018 and 2017: Interest income increased $82.8 million, or 17.4%, in 2018 primarily driven by a $407.6 million higher average gross receivables balance and a 83 basis point increase in yield on loan receivables.

Years Ended December 31, 2017 and 2016: Interest income increased $57.4 million, or 10.1%, in 2017 primarily driven by a $166.3 million higher average gross receivables balance and a 82 basis point increase in yield on loan receivables.

 

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Years Ended December 31, 2016 and 2015: Interest income increased $9.5 million, or 1.7%, in 2016 primarily driven by a $28.8 million higher average gross receivables balance and a 13 basis point increase in yield on loan receivables.

Gain on Sale of Loan Receivables

Nine Months Ended September 30, 2018 and 2017: In the first quarter of 2018, we established a servicing-retained forward flow sale agreement with an institutional investment group, under which we have executed three retail installment contract portfolio sales. For the nine months ended September 30, 2018, we received approximately $270.2 million in cash proceeds from these loan sales, resulting in a $13.7 million gain. The forward flow sale agreement is a two-year contract through which we plan to sell a representative sample of approximately 17% of our new retail installment contract purchases each quarter through March 2020 and retain a servicing fee of approximately 3% on the outstanding balances of the portfolios sold. This arrangement offers an additional source of liquidity to fund operations and provides an attractive incremental source of fee income to supplement our automobile finance business. Under the terms of the sale agreement, the third party has the option to participate in future securitizations of loan receivables through our asset-backed securitization platform to obtain long term financing. There were no loan sales for the nine months ended September 30, 2017. In January 2018, the third party exercised their option to participate in our January 2018 securitization by contributing $98.4 million of loan collateral representing 16.9% of the total loan collateral in the securitization trust. There were no loan sales in 2016 and 2015.

Years Ended December 31, 2017 and 2016: In December 2017, we received $102.8 million in cash proceeds from the sale of loan receivables to a third party. The net carrying balance of the loans sold was $97.5 million, and we recognized a gain on sale of $5.3 million. Under the terms of the sale agreement, the third party had the option to participate in future securitizations of loan receivables through our asset-backed securitization platform to obtain long term financing.

Fee and Other Income

 

Fee and Other Income Summary

($ thousands, rates annualized)

   Nine Months Ended
September 30,
    Years Ended December 31,  
   2018     2017     2017     2016     2015  
     (unaudited)                    

Fee and other income

   $ 5,112     $ 3,583     $ 5,187     $ 11,468     $ 11,577  

Interest income on cash balances

     3,007       1,189       1,787       737       159  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fee and other income

   $ 8,119     $ 4,772     $ 6,974     $ 12,205     $ 11,736  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average gross receivables (AGR)

   $ 3,615,030     $ 3,207,472     $ 3,237,218     $ 3,070,884     $ 3,042,055  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fee and other income as a % of AGR

     0.30     0.20     0.22     0.40     0.39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average cash, cash equivalents and restricted cash

   $ 306,290     $ 265,801     $ 268,156     $ 245,480     $ 226,890  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income as a % of average cash, cash equivalents and restricted cash

     1.31     0.60     0.67     0.30     0.07
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2018 and 2017: Fee and other income in 2018 increased by $3.3 million, or 70.1%, primarily driven by an increase in fees as well as higher interest income earned on restricted cash balances related to our securitization trusts primarily driven by higher investment yields realized on the cash balances.

Years Ended December 31, 2017 and 2016: Fee and other income in 2017 decreased by $5.2 million, or 42.9%, primarily driven by our first quarter 2017 revision to Exeter’s policy with respect to the application of

 

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late borrower payments to principal and interest and fees. Where previously the Company applied late borrower payments first to fees assessed on delinquent balances, in the first quarter of 2017, the Company adopted a more consumer-friendly application policy which first applies borrower payments to delinquent principal and interest balances prior to any fee balances on such loans. Previously, the application of late borrower payments was based on a cash-basis method whereby the Company allocated borrower payments towards paying fee balances first before allocating any payments due to principal or interest. This change in policy reduced fee income recognized for the year ended December 31, 2017, as compared to the prior year ended December 31, 2016, by $6.5 million. Partially offsetting the reduction in fee income was higher interest income earned on restricted cash balances related to our securitization trusts primarily driven by higher investment yields realized on the cash balances.

Beginning in December 2017, we began to service Exeter-originated loans sold to third parties. Servicing revenue is 3.0% annually of the monthly unpaid principal balance of loans serviced, partially offset by unused warehouse facility fees paid on behalf of the institutional investor. Under the terms of the sale agreement, the third party has the option to participate in future securitizations of loan receivables through our asset-backed securitization platform to obtain long term financing. Third party loans contributed into our securitization trusts are consolidated in our condensed consolidated financial statements and servicing revenues are reported as interest on loan receivables in our condensed consolidated statements of operations.

Years Ended December 31, 2016 and 2015: Fee and other income increased by $0.5 million, or 4.0%, in 2016 driven by higher interest income earned on restricted cash balances related to securitization trusts.

Interest Expense

 

Interest Expense Summary

   Nine Months Ended
September 30,
    Years Ended December 31,  

($ thousands, rates annualized)

   2018     2017     2017     2016     2015  
     (unaudited)                    

Securitization notes payable, net

   $ 91,491     $ 76,325     $ 103,444     $ 89,921     $ 72,127