Investor interest in U.S. subprime finance has picked up lately, although that part of the market can be volatile, cautions Fitch Ratings.
In a new report, the rating agency notes that there have been a number of initial public offerings in the U.S. consumer finance sector in recent months; and that those deals have been well received by investors. “The allure of higher returns in consumer lending, particularly subprime lending, has attracted investors and new capital over the last several months,” it notes.
However, it warns that “the market is cyclical, and credit issues can emerge quickly should macro trends deteriorate.”
Indeed, Fitch stresses that “the equity markets can be fickle and a continuation of current trends will depend greatly on underlying economic conditions in the U.S., continued job growth and favourable credit performance.”
Nevertheless, the firm says that the recent success of these deals may pave the way for more IPOs in this sector later this year. For example, it notes that Ally Financial is a possible IPO candidate, as is General Electric’s consumer finance business.
Fitch says that a key milestone for Ally in the IPO process will be the results of US Federal Reserve’s stress testing process, which is currently underway. “Positive results under the [Fed’s] stress test could be a catalyst in determining whether the company decides to pursue an IPO,” it notes.