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Reverse takeover of a sub-subprime lender on high end autos


bizaro86
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I was looking through some regulatory documents, and came across this reverse takeover. I'm not sure what this says about the market in Canada in general, but the bolded jumped out at me. If you can take a company public that specializes in leasing high end cars to new immigrants and international students, is there a bubble?

 

Solution Auto specializes in sourcing and leasing luxury and exotic vehicles,

yachts and other high value assets. Solution works with a select group of

automotive and marine dealerships providing lending solutions to clients who

cannot obtain leasing terms with traditional Canadian financial institutions or

other sub-prime lenders. Typical customers include new immigrants, business

owners and international students. Solution Auto provides a unique leasing

experience whereby it partners with its clients to help them navigate the

challenges of acquiring, insuring, maintaining and upgrading vehicles and luxury

assets in Canada.

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whut, Whut, WHUT????

 

If you are looking at getting a "yacht"....I would think that is a very easy purchase...

 

You simply write a check and that is all.

 

Financing?  WTF???  If you need financing for a "yacht", you don't need a yacht!

 

I would also think the same thing goes for high end exotics/sports cars.

 

Everybody I know that has high end sports cars simply writes a check for them...financing is not even thought of or an option.

 

Back in the day when I owned a high end Corvette and was thinking of getting a Porsche...I asked the Porsche salesman how many people financed their cars...he said it was under 40%, and way less than that for the higher end stuff. 

 

I see signs of the bubble around me every day...I'm getting nervous...

 

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whut, Whut, WHUT????

 

If you are looking at getting a "yacht"....I would think that is a very easy purchase...

 

You simply write a check and that is all.

 

Financing?  WTF???  If you need financing for a "yacht", you don't need a yacht!

 

I would also think the same thing goes for high end exotics/sports cars.

 

Everybody I know that has high end sports cars simply writes a check for them...financing is not even thought of or an option.

 

Back in the day when I owned a high end Corvette and was thinking of getting a Porsche...I asked the Porsche salesman how many people financed their cars...he said it was under 40%, and way less than that for the higher end stuff. 

 

I see signs of the bubble around me every day...I'm getting nervous...

 

People levering up to the gills for consumption, a classic...

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That's a cool thought process.  Does anybody remember the opportunity that BRK exploited for financing HOG during the financial crisis?  In my mind it was more or less the same situation.  Harley Davidson's business was financing the purchase of its motorcycles to a bunch of 50 year-olds who like cruising around, wearing leathers, and trying to look tough.  Some of those guys had money to buy a hog for cash, while others had decent income but were in debt up to their necks.  It was a great business for HOG until they couldn't securitize their bike-loans and couldn't float a debt issuance. 

 

Ultimately, the loans to the 50 year-old wannabe tough-guys were a lot better than the market assessed and it all worked out well in the end (especially well for BRK).

 

So, in Canada, we're not talking about a bunch of overweight white guys who want to buy a Harley as part of their mid-life crisis.  Rather, we are talking about a large number of well-to-do Asians* who sometimes try to impress others with luxury cars for which they do not have adequate cash in Canada to purchase.  My sense is that most of those loans will end up being good, with the exception of a few who might ultimately go bust and run back to China to avoid the debt collectors.

 

Interesting opportunity that I had never considered.

 

 

SJ

 

 

* For those who do not live in Canada, over the past 10 to 20 years we have had an astounding inflow of money from China, and an inflow of Chinese people who effectively purchase a 10-year Canadian residency permit as a means of managing the risk of being rich in a less than democratic country.  There is a demonstrable tendency to buy a large house in Vancouver or Toronto and move the wife and kids (ie, international students) there, as well as some of their money, while the husband continues to do business in China.  While most of their assets are stuck in China, some of these folks are crazy rich and there is a considerable issue within the community of keeping up with the Joneses (er, I mean keeping up with the Chans).  One or more high end cars is a must, irrespective of whether there is adequate cash in their Canadian bank account. 

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I wonder about the advisability of lending money to people secured by depreciating assets where there is no domestic income or asset base. Maybe it will work out fine, but I wonder how many of those loans will be to people who don't have enough money to pay them because it's stuck in China, or who ate trying to keep up with the Chan's without having the same level of wealth. Probably it depends on what interest rate and LTV they use. It does seem to me like Chinese cracking down on capital controls will be a big risk for this business. I do agree the bolded sentence above is a euphemism for "rich asians"

 

Of course, there will soon be a public way to play the thesis, and you could buy shares in the shell company to get a head start...

 

 

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For our non-Canadian readers, this is the sort of thing that goes on in the Greater Vancouver Regional District:

 

http://www.richmond-news.com/news/sports-cars-worth-2-million-impounded-from-richmond-teenagers-amid-suspected-street-racing-1.496108

 

 

The Royal Canadian Mounted Police impounded 13 high end cars and none of the drivers was over the age of 22.  It's a fascinating culture that the really rich Chinese immigrants have developed, where they buy a Lamborghini or Ferrari for their teenage family members.  For kids who live in that strange little world, it's a real hardship to drive a BMW 7-series or an Audi, or a Mercedes C-class when their good buddy Johnny Chan drives a $300,000 super-car.

 

I'd say the loans made to purchase these toys will almost all end up being good loans.  Image is very important in that world, and before long they'll need to replace their 2015 Lotus with something newer and more appropriate!

 

 

SJ

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I watched some time ago a travel show where the host was visiting a bit of a random new 'rich' city in China. He was interviewing a kid that was telling him in all seriousness that he drove a very modest car. He didn't like flashy.

 

It was a black Ferrari if I remember correctly...

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I wonder about the advisability of lending money to people secured by depreciating assets where there is no domestic income or asset base. Maybe it will work out fine, but I wonder how many of those loans will be to people who don't have enough money to pay them because it's stuck in China, or who ate trying to keep up with the Chan's without having the same level of wealth. Probably it depends on what interest rate and LTV they use. It does seem to me like Chinese cracking down on capital controls will be a big risk for this business. I do agree the bolded sentence above is a euphemism for "rich asians"

 

Of course, there will soon be a public way to play the thesis, and you could buy shares in the shell company to get a head start...

 

This is Asian lending - the 'real' collateral is the family name, and maintaining 'face' within the community.

The public loans will not be allowed to default as it carries too much shame; different story for the private loans.

 

SD

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* For those who do not live in Canada, over the past 10 to 20 years we have had an astounding inflow of money from China, and an inflow of Chinese people who effectively purchase a 10-year Canadian residency permit as a means of managing the risk of being rich in a less than democratic country.  There is a demonstrable tendency to buy a large house in Vancouver or Toronto and move the wife and kids (ie, international students) there, as well as some of their money, while the husband continues to do business in China.  While most of their assets are stuck in China, some of these folks are crazy rich and there is a considerable issue within the community of keeping up with the Joneses (er, I mean keeping up with the Chans).  One or more high end cars is a must, irrespective of whether there is adequate cash in their Canadian bank account. 

 

Do you have some more information on why the Chinese are favouring Canada? In particular why Canada (as opposed to other countries) and what happened before the 10-20 years you mention in your post.

 

(Not really familiar with this phenomenon)

 

Thanks

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* For those who do not live in Canada, over the past 10 to 20 years we have had an astounding inflow of money from China, and an inflow of Chinese people who effectively purchase a 10-year Canadian residency permit as a means of managing the risk of being rich in a less than democratic country.  There is a demonstrable tendency to buy a large house in Vancouver or Toronto and move the wife and kids (ie, international students) there, as well as some of their money, while the husband continues to do business in China.  While most of their assets are stuck in China, some of these folks are crazy rich and there is a considerable issue within the community of keeping up with the Joneses (er, I mean keeping up with the Chans).  One or more high end cars is a must, irrespective of whether there is adequate cash in their Canadian bank account. 

 

Do you have some more information on why the Chinese are favouring Canada? In particular why Canada (as opposed to other countries) and what happened before the 10-20 years you mention in your post.

 

(Not really familiar with this phenomenon)

 

Thanks

 

 

Well, here are a few reasons:

 

1) You can get a multiple entry visa valid for 10 years which allows foreigners to visit Canada as many times as they want for up to 6 months at a time. Over those 10 years, the husband comes and goes for visits to Canada to the degree that his business schedule in China permits, and the wife comes and goes  for 6 months at a time as often as she wishes.  For her, she virtually lives in Canada, only needing to leave once every 6 months;

 

2) Houses are easy to buy in Canada for foreigners, and we (and most other western countries) have an effective legal system protecting property rights, so it's a great way for the Chinese to move $1+ million of money offshore and protect it in a bricks and mortar investment away from the reach of the Chinese government;

 

3) Children of Chinese can get a good post-secondary education in Canada, and after completing a four year degree (er, maybe 5 or 6 years for some of them!), the kids will speak English very well.  By studying in Canada, they also meet the residency requirements to become a permanent resident of Canada.  Citizenship is routinely extended to permanent residents who are well educated and have a prospect of being a productive member of society;

 

4) Once the kids become citizens, they can sponsor their parents for Canadian citizenship under the family reunification element of our immigration program.  This provides preferential access for the parents to become Canadian citizens, possibly shortly after their 10-year multiple entry visa expires. 

 

 

So, all in all, Canada is a great risk management tool for the wealthy Chinese.  It's a way to get some of their money out of the country and invest it in western real estate protected by a western legal system, and it gets them a foothold into a western country that can culminate in citizenship.  If their relationship with the Chinese government (and the party which is occasionally capricious with the rich) deteriorates, at least they have an excellent safety net.

 

Other western countries are also popular destinations, but Canada is notorious for being an easy place to enter and Canadians are notoriously tolerant and welcoming of foreigners (after all, the country is composed of relatively recent immigrants).

 

 

SJ

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To add a bit on what SJ said, Canada also has investor immigration program. If you have a couple million it's really easy to become a Canadian resident and citizen.

 

Until recently one could qualify for the investor program essentially with real estate investments. If sure there's an army of lawyers in a room somewhere now trying to figure out how to get around the new regs.

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Hey all:

 

If the supposition of loaning to rich Chinese nationals is correct...are you comfortable investing in a company whose purpose is to help their customer flout/skirt capital controls?  Even if it is with a nominally communist country?

 

What happens if China protests about this to the Canadian government?  What happens if "hackers" somehow get a customer list of the company?

 

I guess helping Chinese nationals who are rich, but have difficulty moving capital out of China, is nominally a better business model than just loaning it to immigrants who want to live the "high life"...

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Hey all:

 

If the supposition of loaning to rich Chinese nationals is correct...are you comfortable investing in a company whose purpose is to help their customer flout/skirt capital controls?  Even if it is with a nominally communist country?

 

What happens if China protests about this to the Canadian government?  What happens if "hackers" somehow get a customer list of the company?

 

I guess helping Chinese nationals who are rich, but have difficulty moving capital out of China, is nominally a better business model than just loaning it to immigrants who want to live the "high life"...

 

You guess? This just went from "wtf is this? lol" to "hey that's clever!" with StubbleJumper's post. This could work, especially of the collateral stays in Canada to collect when some of the customers flee back to Canada.

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To add a bit on what SJ said, Canada also has investor immigration program. If you have a couple million it's really easy to become a Canadian resident and citizen.

 

Until recently one could qualify for the investor program essentially with real estate investments. If sure there's an army of lawyers in a room somewhere now trying to figure out how to get around the new regs.

 

Almost every Western country has investor immigration program. US does. Australia does. NZ does. Maybe Canadian one is easier to deal with, but my guess it's not the main draw for Chinese to Canada.

 

My guess it would have been the other reasons mentioned, easy (?) entry after Hong Kong reverted to China, large communities to join.

 

Not sure why US is less attractive. Perhaps a bit tougher entry/immigration. There's clearly a lot of Chinese immigration, education-based entry and RE purchases in US, but still seems way less than Canada. And way less (almost none) RE price bubble based on Chinese RE purchases. There's a bunch of Chinese RE purchases in US, but seems nothing as big as in Canada.

 

 

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StubbleJumper, thank you for your information.

 

Could you perhaps tell me why a Chinese person seeking to 'lock-in' his wealth in Canada can buy RE valued at > 1 mio, but needs to lease a car? Is there a difference in legislation, or is this just personal preference? Another reason?

 

Just trying to understand the phenomenon.

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To add a bit on what SJ said, Canada also has investor immigration program. If you have a couple million it's really easy to become a Canadian resident and citizen.

 

Until recently one could qualify for the investor program essentially with real estate investments. If sure there's an army of lawyers in a room somewhere now trying to figure out how to get around the new regs.

 

Almost every Western country has investor immigration program. US does. Australia does. NZ does. Maybe Canadian one is easier to deal with, but my guess it's not the main draw for Chinese to Canada.

 

My guess it would have been the other reasons mentioned, easy (?) entry after Hong Kong reverted to China, large communities to join.

 

Not sure why US is less attractive. Perhaps a bit tougher entry/immigration. There's clearly a lot of Chinese immigration, education-based entry and RE purchases in US, but still seems way less than Canada. And way less (almost none) RE price bubble based on Chinese RE purchases. There's a bunch of Chinese RE purchases in US, but seems nothing as big as in Canada.

Australia and NZ are facing similar issues as Canada re Chinese money.

 

The US is less attractive for a number of reasons: unfriendly immigration policies, political issues, education is much more expensive, no healthcare, hard to get citizenship, etc. On top of that there's a fear that the US may just take your stuff if it so decides one day. No such fears with Canada, Oz and NZ. Despite all that the US is still getting a good chunk of Chinese money. It's not as obvious because the US economy is much larger. The effect is a lot different when $100 billion of Chinese money hits British Columbia (GDP $250 billion) than when $100 billion of Chinese money hits California (GDP 2.5 trillion).

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StubbleJumper, thank you for your information.

 

Could you perhaps tell me why a Chinese person seeking to 'lock-in' his wealth in Canada can buy RE valued at > 1 mio, but needs to lease a car? Is there a difference in legislation, or is this just personal preference? Another reason?

 

Just trying to understand the phenomenon.

That's a good question. Maybe SJ can can add more flavour but here's what I can tell you.

 

1. When you're dealing with shady money you want to touch it as little as you can. These cars probably aren't leased by people but by trusts or numbered companies.

2. Could be a matter of preference/money management. The real estate is the savings/capital account. Junior's car goes to the chequing account so to speak.

3. There is difference in legislation. You can buy houses and not pay tax. If you buy a bunch of Ferraris the government can assign you an income (whatever they feel like) and make you pay tax on it. I don't think this is a reason though because this tool isn't used often and the Chinese haven't been quite sloppy in covering their tax bases. Just putting it out there that there is legislation in place.

 

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StubbleJumper, thank you for your information.

 

Could you perhaps tell me why a Chinese person seeking to 'lock-in' his wealth in Canada can buy RE valued at > 1 mio, but needs to lease a car? Is there a difference in legislation, or is this just personal preference? Another reason?

 

Just trying to understand the phenomenon.

 

 

Getting money out of China is not easy.  I understand that people are only allowed to transfer out US$50k per year.  To buy a house, a legion of lawyers and consultants is required to grease some palms, arrange to use 30 or 40 people's annual allocation to move the money, or create some sort of fraudulent business transaction that enables a "payment" to look like it's not the movement of capital.  This is all worthwhile to buy a house in Vancouver for Cdn$2 million or Cdn$3 million, but it's not very compelling to effectively commit a form of fraud just to buy a $300,000 car.  It's much easier to lease it or to take a car loan for that sort of "small" transaction.

 

There was a great article in the New Yorker about these Chinese kids in Vancouver:

 

https://www.newyorker.com/magazine/2016/02/22/chinas-rich-kids-head-west

 

 

SJ

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To add a bit on what SJ said, Canada also has investor immigration program. If you have a couple million it's really easy to become a Canadian resident and citizen.

 

Until recently one could qualify for the investor program essentially with real estate investments. If sure there's an army of lawyers in a room somewhere now trying to figure out how to get around the new regs.

 

Almost every Western country has investor immigration program. US does. Australia does. NZ does. Maybe Canadian one is easier to deal with, but my guess it's not the main draw for Chinese to Canada.

 

My guess it would have been the other reasons mentioned, easy (?) entry after Hong Kong reverted to China, large communities to join.

 

Not sure why US is less attractive. Perhaps a bit tougher entry/immigration. There's clearly a lot of Chinese immigration, education-based entry and RE purchases in US, but still seems way less than Canada. And way less (almost none) RE price bubble based on Chinese RE purchases. There's a bunch of Chinese RE purchases in US, but seems nothing as big as in Canada.

Australia and NZ are facing similar issues as Canada re Chinese money.

 

The US is less attractive for a number of reasons: unfriendly immigration policies, political issues, education is much more expensive, no healthcare, hard to get citizenship, etc. On top of that there's a fear that the US may just take your stuff if it so decides one day. No such fears with Canada, Oz and NZ. Despite all that the US is still getting a good chunk of Chinese money. It's not as obvious because the US economy is much larger. The effect is a lot different when $100 billion of Chinese money hits British Columbia (GDP $250 billion) than when $100 billion of Chinese money hits California (GDP 2.5 trillion).

 

This is all correct.  The main reason initially was the cost of buying into the Canadian program was 1/4 to 1/2 of the US program.  Once Vancouver (and Toronto) became normal then the numbers just multiplied.  I work with a bunch of small businesses in China where the owners are all in their late 50s and 60s and 10 of 15 have done exactly what is described and all to Vancouver.  2 did the same in SoCal.

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Hey all:

 

If the supposition of loaning to rich Chinese nationals is correct...are you comfortable investing in a company whose purpose is to help their customer flout/skirt capital controls?  Even if it is with a nominally communist country?

 

What happens if China protests about this to the Canadian government?  What happens if "hackers" somehow get a customer list of the company?

 

I guess helping Chinese nationals who are rich, but have difficulty moving capital out of China, is nominally a better business model than just loaning it to immigrants who want to live the "high life"...

 

You guess? This just went from "wtf is this? lol" to "hey that's clever!" with StubbleJumper's post. This could work, especially of the collateral stays in Canada to collect when some of the customers flee back to Canada.

Perhaps you misunderstood me....yes, it is a SLIGHTLY better business model (skirting capital controls) than just loaning to dudes & dudettes who want to live the "high life".

 

All in all, color me skeptical...maybe this works out...but I am doubtful.

 

Oh, and think about this....If a company is depending on skirting the law, and is willing to break(bend) rules....what do you want to bet that they will be willing to skirt(break) trust with investors & other stakeholders?

 

In no way, shape, or form would I be investing in this.

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