The effects of the credit crunch struck yet again yesterday when Elephant Loans, the specialist sub-prime loans broker listed on London’s junior investment market, gave warning that full-year profits would take a hit.

Analysts had predicted sales of £5.6 million for the full year.

The company, which arranges loans between banks and customers with poor credit records and also operates in the debt consolidation market, said that profits were likely to be below forecasts. Elephant said in a trading update that it had become more difficult to find lenders for sub-prime borrowers after some banks tightened their criteria, while others pulled out of the market altogether amid a worldwide halt in inter-bank lending.

It said that “against this background, the company experienced a challenging first half. Reflecting additional market turmoil, sales in August and September fell as lenders reconsidered their product offerings and average loan completion times lengthened.”

Five of Britain’s largest brokers and intermediaries have pulled out of the sub-prime loans market since August, including Southern Pacific and Kensington, while GMAC-RFC has abandoned plans to go into secured loans. This month Morgan Stanley said that it would withdraw its ADV2 secured loan range from the market.

Despite the difficulties, Elephant said that it expected a “significantly improved” second-half performance after “record levels” of inquiries from would-be borrowers being turned away by mainstream banks.

However, Ray Boulger, technical director at Charcol, the mortgage broker, said: “The jury’s out on that. Once a market suffers as badly as this, it takes a while to turn around. The question is whether Elephant [will] be able to place loans and whether people who thought they qualified for prime loans are prepared to take sub-prime rates as high as 10 per cent and more.” Elephant also said that its bottom line would suffer as a result of its exposure to individual voluntary arrangements.

Elephant, which was listed on AIM in November 2005, reported operating profits of £536,000 on commission income of £2.95 million in the year to March 31. It said that it would embark on cost-cutting plans but downplayed the prospect of job losses.

Elephant said that it would spin out 51 per cent of DebtSmashers to Philip Grady, an insolvency specialist, and Grant Thornton, the consultant, creating a create a new company, DebtSmashers UK. Elephant will retain a 49 per cent stake in Debtsmashers UK and will retain 100 per cent of the commission generated on referrals up to £2.5 million over five years.

Elephant shares closed at ¾p, down 14 per cent.

Elephant Loans and Mortgages is not to be confused with elephant.co. uk, the car insurer, which is part of Admiral Group.

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