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TD Bank to obtain VFC

Acquisition would expand bank’s auto lending that is indirect

TD Bank Financial Gropu and VFC Inc. Today announced they’ve entered into an understanding under which TD offer to get VFC, a respected provider of automotive purchase funding and customer installment loans.

“This purchase is a rational extension of y our existing company being a frontrunner in dealer-based vehicle funding and a chance they want, ” saysTim Hockey, group head, personal banking, TD and co-chair, TD Canada Trust for us to increase our range of product offerings in response to what dealers and their customers have said. “VFC and its particular outstanding management team have a demonstrated background as leaders in exactly what we come across as an underserved, growing market. ”

“We think the possibility synergies for the two companies, especially pertaining to referrals and circulation, will help our development strategy, ” claims Charles Stewart, president and CEO of VFC.

VFC, with workplaces in Toronto, Montreal and Nanaimo, has a lot more than 220 workers servicing a profile of $380 million in finance receivables, representing a lot more than 25,000 clients through a system of 2,000 automobile that is pre-qualified across Canada.

It’s meant that VFC continues to run under its brand that is existing and framework. TD expects the purchase become basic to its earnings in 2006 and modestly accretive in 2007.

Dominion Bond Rating provider claims it the offer must certanly be workable.

VFC is primarily a nonprime finance lender that is automotive. “The deal launches TD into the non-prime car finance company, that has maybe perhaps perhaps not historically been a place of specialization for the bank, ” it claims. “TD intends to use the company with an independent brand name to obviously delineate involving the higher-risk financing operations and TD’s very very very own, lower-risk prime car financing company. ”

Additionally, management will likely be retained to benefit from their understanding of this section regarding the company, it notes. The fundamental business design is certainly one of high margins offset by high loan losings.

The believed purchase cost (about $326 million in money or stock) is more or less 4.2 times book value and 18 times forecast 2006 profits, showing the high growth potential of VFC, DBRS determines.

“Assuming an all-cash deal, the calculated negative effect on TD’s Tier 1 Capital ratio and concrete typical equity ratio is certainly not significant at about 22 and 21 foundation points, correspondingly, ” it says. “While the profile is higher-risk in the wild, associated credit risks are manageable considering that the profile represents no more than 20 basis points associated with bank’s total customer financing portfolio. ”

Moody’s Investors Service has additionally affirmed the ranks and perspective of TD Bank on news of the planned purchase of VFC.

Overall, Moody’s said it viewed the deal as being a small credit challenge. Even though this acquisition strengthens TD’s competitive place within the Canadian automotive dealer market, the score agency noted that experience of this type of company is typically a credit concern. Barriers to entry in automobile lending are low and, because of this, profitability is at the mercy of significant volatility as loan providers enter or leave the business enterprise.

Using this view to TD’s acquisition that is latest, Moody’s noted that VFC’s indirect customer lending business targets a lowered quality debtor compared to typical TD retail client. Compounding this danger is just a reasonably unseasoned profile that is growing highly; its 4-year cumulative typical development rate of originations is more or less 49%.

In Moody’s view, fairly young, sub-prime customer financing portfolios with a high development prices are at risk of asset quality deterioration that is unexpected. The company’s portfolio, however, is small: VFC’s $355 million in managed receivables account for only 0.2percent of TD’s domestic portfolio that is retail. More over, VFC has paid because of this proportionately greater risk profile with a high comes back. Return on normal receiving assets is 4.0%, versus TD’s historic performance of around 1%.

In connection with future way of TD’s reviews, Moody’s said that upward rating stress would probably have a continued strengthening of TD’s performance on Moody’s key profitability and asset quality ratios, plus the avoidance of any material strategic or functional setbacks within the U.S. Negative score pressure could emerge in the event that intrinsic economic energy of TD’s US subsidiary, TD Banknorth Inc., had been to damage.

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