CASE PROFILE: Subprime car dealer Auto Masters files Chapter 11 after Capital One attempts to appoint receiver - Debtwire

CASE PROFILE: Subprime car dealer Auto Masters files Chapter 11 after Capital One attempts to appoint receiver

19 October 2017 - 12:00 am

Auto Masters, a chain of nine car dealerships operating under a “buy here, pay here” model, has filed for Chapter 11 in order to block a state court lawsuit from its secured lender that sought the appointment of a receiver to run the company.

The dealerships sell primarily to low-income, low-credit buyers, financing their vehicle purchases through a minimal down payment and monthly payment installments with interest. The company’s business became strained when secured lender Capital One, owed USD 47m, decided to stop providing financing to the “buy here, pay here” model earlier this year. The company’s troubles were further exacerbated by recently discovered accounting error that overvalued its collateral, leading to a lawsuit from the lender.

Now with bankruptcy protection, the company said in court documents that it hopes to propose a plan that would pay all creditors in full. Judge Charles Walker of the US Bankruptcy Court for the Middle District of Tennessee is scheduled to hold a hearing today at 3pm CT to consider the company’s USD 10.5m in debtor-in-possession (DIP) financing and other first day motions.

CLICK HERE to view all Auto Masters Chapter 11 filings on Debtwire Dockets.



The company

Auto Masters said in a document laying out its reasons for entering bankruptcy that it “refuses to be lumped in” with other “buy here, pay here” lenders. The company boasts that it has “clean, modern and either new or relatively new facilities” compared to other such dealers who it says have “low quality, high mileage vehicles” in “poorly maintained lots.”

Prior to 2011, the company had various agreements under which lenders would pay for vehicles at auction and dealerships would repay lenders over time with interest while financing customer purchases of cars. The company said that it did not have difficulty selling cars under that model but that it “limited the number of cars they could self-finance through their own operating capital.”

In 2011, Auto Masters entered into a USD 15m secured line of credit agreement with Capital One. Under that system, the company could finance cars without having to tap its own cash reserves. The credit line with Capital One eventually grew to USD 47m, plus a separate line USD 16m line for the same purposes with First Tennessee Bank.



The debt



The descent

The company said its business was “thriving” from 2011 through 2015, with a strong relationship with Capital One. But in early 2016, several Capital One officers left the company to form Ovation Finance 2 Holdings LLC, an entity currently owed USD 7.4m in subordinated secured debt. Later in 2016, Capital One decided to stop lending in the “buy here, sell here” sector, the debtor said.

The company was forced to self-finance its vehicle sales as it struggled to repay its lines of credit. In September, Auto Masters attempted to sell some of its receivables to repay part of its debt, but learned through an accounting error that it had overstated the collateral value of its assets at USD 90m instead of USD 65m, the actual figure.

On 11 October, Capital One sued Auto Masters in the Chancery Court for the District of Tennessee, 20th Judicial District, Davidson County, seeking to appoint a receiver. The court scheduled a hearing for 17 October, but Auto Master filed its Chapter 11 just in time to halt the proceedings.

Automotive Finance Corp (AFC) is owed approximately USD 4.5m in subordinated secured debt it provided to the company’s dealerships. AFC will provide the company with USD 10.5m in DIP financing to keep the company’s dealerships operating in Chapter 11, though it has also filed an objection to the debtors’ proposed use of cash collateral, citing adequate protection concerns.

Capital One also filed an objection to the use of cash collateral.

“These are not ‘ordinary’ Chapter 11 filings,” the bank wrote. “Rather, only a few days ago the debtors disclosed for the first time to [Capital One] that they have been massively misrepresenting the value and status of their assets.” The primary collateral for the loans consists of subprime consumer auto loans, and financial irregularities at Auto Masters mean that the company’s assertions about the value of its assets “now cannot be taken at face value,” Capital One said.



The advisors




The case is In re: Auto Masters LLC, number 17-07036, in the US Bankruptcy Court for the Middle District of Tennessee.

CLICK HERE to view the petition.
CLICK HERE to view the DIP financing motion.
CLICK HERE to view the cash collateral motion.
CLICK HERE to view the company profile.