Automotive Finance Corp. writes off $162 million, reflecting slow auto sales

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Slowing auto sales have forced another locally based auto financier to take a big write-off on the declining value of its
loan portfolio.

Carmel-based Automotive Finance Corp., which lends money to car dealers to buy used vehicles at auction, took a $161.5 million
non-cash charge against good will in the third quarter.

Earlier this month, Indianapolis-based White River Capital Inc. took a $34.5 million non-cash write-off to reflect the declining
value of loans held by subsidiaries Union Acceptance Credit Corp. and Coastal Credit LLC.

Because of "increased risk associated with lending in the automotive industry, AFC has tightened credit policies and
experienced
a decline in its portfolio of finance receivables," states the third-quarter report of AFC parent KAR Holdings Inc.

The $161.5 million charge for AFC produced a third-quarter loss for parent KAR Holdings of $169.9 million.

Carmel-based KAR is better known for its primary subsidiary, Adesa Auction Services, the nation’s second-largest used-vehicle
auction chain.

KAR also owns Westchester, Ill.-based Insurance Auto Auctions, which sells salvaged vehicles.

AFC lost $147 million for the quarter on revenue that fell 35 percent, to $22.8 million.

KAR’s auction units held their own. Adesa turned in a third-quarter profit of $54 million on revenue that rose 19 percent,
to $286 million. KAR’s Illinois-based auction made $15.4 million on revenue that was 15-percent higher, at $135.4 million.

But conditions worsened late in the third quarter, said KAR Chairman and CEO Brian Clingen in a Nov. 14 earnings conference
call. "We have unprecedented numbers of these dealers going out of business."

Auction firms, and in turn firms that finance dealer purchases at auction, also have been hit by declining vehicle values
in general.

At AFC, revenue per loan transaction fell 33 percent, said KAR. AFC’s loan portfolio is shrinking and likely will stabilize
down about 30 percent lower than its high mark at the end of last year, Clingen said. As of Sept. 30, AFC managed finance
receivables of $700.3 million.

To help stabilize the unit, KAR has closed 14 AFC branches and satellite locations. Clingen said AFC continues to focus on
writing new business and on improving collections.

"On the positive front, this business in total continues to be a very significant generator of cash," Clingen said.

"We will make this business stronger and we expect it will provide an important source of capital to buyers at our auctions,"
said Eric Loughmiller, executive vice president and chief financial officer of KAR.

How long that takes depends on the recovery of the automotive business, in particular the dealer base.

Some analysts are now forecasting acceleration in the decline of new-car dealerships due to slow sales, higher operating costs
and tightening credit for consumers.

Last month, Southfield, Mich.-based Grant Thornton Corporate Advisory and Restructuring Services estimated that more than
3,800 dealerships would need to close to maintain sales per dealer at last year’s level of roughly 750 vehicles.

"Significant consolidation is necessary, especially among Ford, General Motors and Chrysler retailers, because U.S. sales
already have declined more than 1 million units this year," Grant Thornton partner Paul Melville said last month.

"We continue to be very guarded in our outlook as to when the dealers will begin to recover … that really is a concern
and
a question mark for us," Clingen said.

KAR officials said the $161.5 million write-down at AFC does not affect covenants of its credit facilities. KAR has nearly
$1.9 billion in credit, including a $300 million revolving line of credit that has not been drawn on.

The credit facility was set up as part of a deal nearly two years ago to take Adesa private in a $3.7 billion sale to private
equity firms, including Kelso & Co. and Parthenon Capital.

It’s unclear just how the challenges of the auto business have affected another local financer of dealer vehicle purchases,
Carmel-based Dealer Services Corp.

DSC was founded in 2005 by John Fuller, who founded AFC and sold it to Adesa in 1994. DSC has been closing on AFC in size,
with $550 million in loan receivables and 71 branches around the United States.

Fuller declined to elaborate on how the market downturn has affected the private company’s portfolio.

"We were able to hire some of the best in the industry when we started and it has played to our benefit," he said.

If there’s a silver lining for used auto auctions and financing arms, it’s that many dealers are focusing more on used car
sales and on the parts and service business to weather the downturn in new vehicle sales, said Randy Berlin, a partner in
Detroit-based automotive industry consultancy Urban Science.

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