Santander US auto arm raises $1.8 billion in IPO

Arash Massoudi and Vivianne Rodrigues

Santander Consumer USA, a provider of auto loans to subprime buyers, has raised $1.8 billion from an initial public offering amid a recovery in U.S. car sales and strong investor interest in high-yielding loans sold by consumer finance companies.

The company, which is controlled by the Spanish bank Santander, sold 75 million shares, or about 21.5 percent of its shares, at $24 each on Wednesday after increasing the size of the offering and moving it up by one day.

A US listing will allow private equity investors Warburg Pincus, KKR and Centerbridge Partners to sell a large portion of their combined 25 percent stake, which they acquired in 2011 for $1 billion. The trio are cutting their stake to 7 percent.

(Read more: Subprime deja vu: Car lending standards ease)

Bank of Santander Headquarters
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Santander Consumer USA will not receive any of the proceeds from the offering, which values the entire company at $8.3 billion.

The bulk of the remaining shares offered to investors have come from Santander, which will retain about 61 percent of the company's shares after listing.

The IPO is the latest consumer finance company to see strong interest from stock investors. Shares in Springleaf, the former subprime consumer lending arm of the bailed-out insurer AIG, have climbed 51 percent since raising $411 million from an October IPO.

(Read more: US automakers fall further behind foreign brands)

Santander Consumer offers loans to car buyers, including to those with weaker credit histories. It says it has relationships with over 14,000 car dealerships in the U.S..

The company also securitizes car loans, having issued and sold over $26 billion in packaged loans since 2010 according to its prospectus. With benchmark interest rates hovering near historic lows, issuance of these securities is expected to remain robust in 2014 as investors chase higher returns.

What we learn from auto loans?

Forecasts for an increase in U.S. economic activity and higher consumer spending in the coming months has encouraged a growing number of investors to buy assets tied to lower-quality credit loans. In spite of the boom in auto subprime lending in recent months, analysts said market conditions are not yet "frothy".

(Read more: US automakers fall further, says study)

Santander Consumer had net profits of $583.6 million in the nine months to September 30, down $12.3 million from the same period in 2012.

Santander entered the US auto lending market in 2006 and expanded by means of purchasing distressed portfolios of subprime loans from other lenders.

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Spinning off parts of its foreign subsidiaries has become a core strategy for Santander in the wake of the financial crisis, with the bank having listed part of its Brazilian subsidiary in 2009. It later sold stakes in its Chilean, Polish and Mexican arms.

Citigroup and JPMorgan were lead underwriters for the listing, which is set to begin trading on the New York Stock Exchange under the symbol SC on Thursday.