TD Bank Financial Gropu and VFC Inc. today announced they have entered into an agreement under which TD will offer to acquire VFC, a leading provider of automotive purchase financing and consumer installment loans.

“This acquisition is a logical extension of our existing business as a leader in dealer-based automobile financing and an opportunity for us to increase our range of product offerings in response to what dealers and their customers have said they want,” saysTim Hockey, group head, personal banking, TD and co-chair, TD Canada Trust. “VFC and its outstanding management team have a demonstrated track record as leaders in what we see as an underserved, growing market.”

“We believe the potential synergies of the two organizations, particularly with regard to referrals and distribution, will assist our growth strategy,” says Charles Stewart, president and CEO of VFC.

VFC, with offices in Toronto, Montreal and Nanaimo, has more than 220 employees servicing a portfolio of $380 million in finance receivables, representing more than 25,000 customers through a network of 2,000 pre-qualified automobile dealers across Canada.

It is intended that VFC will continue to operate under its existing brand and management structure. TD expects the acquisition to be neutral to its earnings in 2006 and modestly accretive in 2007.

Dominion Bond Rating Service says it the deal should be manageable.

VFC is primarily a nonprime automotive finance lender. “The deal launches TD into the non-prime auto finance business, which has not historically been an area of specialization for the bank,” it says. “TD intends to operate the business with a separate brand to clearly delineate between the higher-risk lending operations and TD’s own, lower-risk prime auto lending business.”

Also, management will be retained to take advantage of their knowledge of this segment of the business, it notes. The basic business model is one of high margins offset by high loan losses.

The estimated purchase price (about $326 million in cash or stock) is approximately 4.2 times book value and 18 times forecast 2006 earnings, reflecting the high growth potential of VFC, DBRS calculates.

“Assuming an all-cash deal, the estimated negative impact on TD’s Tier 1 Capital ratio and tangible common equity ratio is not significant at about 22 and 21 basis points, respectively,” it says. “While the portfolio is higher-risk in nature, associated credit risks are manageable since the portfolio represents only about 20 basis points of the bank’s total consumer lending portfolio.”

Moody’s Investors Service has also affirmed the ratings and outlook of TD Bank on news of its planned acquisition of VFC.

Overall, Moody’s said it viewed the transaction as a slight credit challenge. Although this acquisition strengthens TD’s competitive position in the Canadian automotive dealer market, the rating agency noted that exposure to this line of business is typically a credit concern. Barriers to entry in auto lending are low and, as a result, profitability is subject to significant volatility as lenders enter or exit the business.

Applying this view to TD’s latest acquisition, Moody’s noted that VFC’s indirect consumer lending business targets a lower quality borrower than the typical TD retail client. Compounding this risk is a relatively unseasoned portfolio that is growing strongly; its 4-year cumulative average growth rate of originations is approximately 49%.

In Moody’s view, relatively young, sub-prime consumer lending portfolios with high growth rates are susceptible to unexpected asset quality deterioration. The company’s portfolio, however, is small: VFC’s $355 million in managed receivables account for just 0.2% of TD’s domestic retail
portfolio. Moreover, VFC has compensated for this proportionately higher risk profile with high returns. Return on average earning assets is 4.0%, versus TD’s historic performance of approximately 1%.

Regarding the future direction of TD’s ratings, Moody’s said that upward rating pressure would likely follow a continued strengthening of TD’s performance on Moody’s key profitability and asset quality ratios, and the avoidance of any material strategic or operational setbacks in the U.S. Negative rating pressure could emerge if the intrinsic financial strength of TD’s US subsidiary, TD Banknorth Inc., were to weaken.