The fate of Delta Financial does not look too promising based on its third quarter earnings report. Due to market disruptions, the company could not continue with its traditional approach of securitizing and retaining the excess interest. Instead, the company needed to securitize and unload everything, at a steep 10% loss to the company.
And, I would look at their balance sheet in the following light. Take their 115 million in equity and add the 75 million in allowance for loan losses, giving you 190 million in "adjusted" equity.
Now, they have 6,630 million in securitized loans plus 62 million real estate and 32 million trustee receivables, adding up to 6,724 million. The debt balance that these loans secure is 6,510 million. That leaves approximately 214 million in "at-risk" capital in their securitizations, which counts on their balance sheet towards equity. You can judge how at-risk it is based on their current delinquency numbers:
The 214 million is only about 33% of 90 day + delinquencies, meaning there is a strong likelihood that most of this capital be wiped out. The only hope would be that some of the earlier securitizations will perform better than others, leaving some capital to be returned to Delta.
Meanwhile, Delta also has 480 million in pre-securitized loans which are backed with about 475 million in warehouse facilities and other borrowings. If the conditions in the market have not improved since the end of the 3rd quarter, then Delta will probably also take a further hit in capital from the sale of these loans. We saw in that in the 3rd quarter they were taking 10% losses on these loan sales.
Delta has been increasing the interest rate on its loan, and they just cut a quarter of their staff to lower their costs and loan production. So we can hope that fairly soon the ongoing business can stabilize. But the very poor delinquency performance of their securitizations this quarter show two things. One, their equity is in danger of being wiped out, and that another cash infusion at very unfavorable terms will probably be necessary. Two, Delta's niche underwriting in the sub-prime market might not be as good as they made it out to seem.