Coronavirus Roils Confidence; How Will Consumer Credit Hold Up?; LC+Radius

by | Mar 8, 2020 | Blog | 0 comments

Greetings,

Coronavirus news overshadowed a hot jobs report of ~270K new jobs and a downtick in unemployment rate to 3.5%. 

The Fed cut rates to a 1-to-1.25% target range in an unscheduled FOMC meeting. Fed futures are expecting another rate cut at the next scheduled meeting in two weeks. Doubleline’s Gundlach expects the Fed to ultimately drop rates to zero. 

Markets do not know the scale and scope of COVID-19’s impact. Markets are also skeptical that a rate cut can stop consumers from hunkering down and some question the logic:

  • Equity markets continued to test new lows despite the Fed’s action and strong jobs report. 
  • The U.S. 10-year bond dropped to a jaw-dropping 70 BPS. 
  • The VIX fear gauge remained in the mid-40s this Friday – sustained levels which have not been seen since the depths of the 2008 crisis. 
  • JP Morgan notes early signs of stress in credit & funding markets.

U.S. Consumers are Shifting to a “Hunker Down” Bunker Mentality

Visa reported that credit card spending dropped and has not yet hit the bottom (although still expects high single-digit revenue growth this quarter). In some markets, consumers have started panic-buying at Costco, Target, and Walmart. 

Anecdotally, an airline executive remarked that the drop in travel resembles the post-9/11 spending plunge. Informal polling from downtown NYC, which is far from being designated as a “cluster,” indicates that restaurant sales are down about 50%. 

This week, we summarize the key risk factors. (PeerIQ Analytics customers should reach out to their client coverage lead to see what the risks may mean for their portfolios by geography and asset class).

What Type of Credit Risk Should PeerIQ Customers Focus On?

  • Small business and MCA loans to thinly-capitalized to physical retail small business owners (e.g., restaurants, hair salons, etc.).
    • Investors are punishing shares of ONDK, which hit a low at a $200 MM market cap compared to ~$290 MM book value, and a $1.3 Bn lending portfolio.
    • ONDK announced $50 MM in stock repurchase 3 weeks ago and has the ability to purchase $50 MM more.
  • Small businesses that are unable to sell due to supply-chain shocks from China.
  • Small businesses that generate revenue from discretionary spending (e.g., retail, travel/lodging, advertising, UBER drivers, movies, etc.) or businesses indexed to senior care facilities.

What about U.S. Consumer Loans?

  • As of now, we have yet to see major job losses or shocks to income. We would not expect immediate deterioration in consumer credit performance. Unemployment is low. Discretionary spending is down, freeing up cash flow. Mortgage rates hit a record low of 3.29% for a 30-year fixed-rate mortgage offering potential for refinance.
  • If there is a temporary lull (a few months) in activity, we can expect a V-shaped bounce in spending and demand when confidence is restored. 
  • If there is a protracted drop in activity (quarters), we would expect fiscal measures such as payroll tax cuts or attempts to protect credit (remember 9/11 airline bailout?). 
  • Which of these two worlds should we expect? The goal of public health policy is to reduce the number of cases at the peak of the epidemic. This extends the length of the epidemic but reduces the total number of cases at any one time, improving outcomes for patients.
  • It’s an election year, so maybe some other goodies too. Policymakers are also looking at micro-targeted programs for consumers/small businesses in hard-hit areas. (Japan is starting to offer interest-free loans to small businesses.)
  • Within consumer credit we should expect:
    • Short duration loans should outperform longer-term loans. 6-month POS loans should do just fine.
    • Credit card receivables should perform well (primarily to high-quality average credit exposures), credit line risk management, and consumers preference for liquidity during a crisis.
    • Consumer loans that masquerade as small business loans (e.g., the obligor is an individual that runs a small business) are at most risk.

American Express has an investor day on March 17th — we should learn more about impacts to credit and payments then. (So far, Amex is downplaying the effects of COVID-19.)

Latest on Lending Club & Radius Bank

American Banker’s Jim Dobbs has further analysis on LendingClub’s announced acquisition of Radius Bank. Some excerpts:

  • LendingClub’s agreement to acquire Radius Bancorp — a bold move for a marketplace lender — will likely invite intense regulatory scrutiny that could set ground rules for future deals involving FinTechs buying banks.
  • Executives at LendingClub have expected a 12 to 15-month review process.
  • The time frame could hinge on how thorough regulators will be with their evaluation and any conditions they set for the San Francisco lender before signing off on a $185 million acquisition that will provide LendingClub with a bank charter.
  • LendingClub expects an ‘intensive approval process’ that executives are approaching ‘with a collaborative spirit and cautious optimism,’ said its CEO, Scott Sanborn, during a press conference.
  • The Federal Reserve and the OCC will likely be the most involved – and most vocal – regulators reviewing the transaction, industry experts said. Representatives for the agencies said they typically do not comment on pending transactions. 

In industry news, the WSJ’s Telis Demos reports that Square Keeps Rolling Along. Some excerpts:

  • Square’s year-over-year gross payment volume once again increased by 25% despite a pricing change.
  • In 2020, Square’s enterprise value has traded as high as 65 times its forward EBITDA. That is up sharply from a low near 40 times in 2019, after the company’s transaction volume growth slowed.
  • The percentage of volume the company kept as transaction gross profit was 1.09%.
  • Gross profit from its seller business grew 27% from a year earlier, compared to 26% year-over-year in the third quarter.

In financing news, we note this is the first week in several without an announced M&A transaction. 

Lendio closed a $55M Series E funding round led by Mercato Partners. Lendio, led by CEO, Brock Blake, announced that it has secured $55 million in capital, including $31 million in equity led by Mercato Partners’ Traverse Fund, and a $24 million debt facility from Signature Bank.

Lendio is the largest small business loan marketplace in the U.S. Small business owners utilize Lendio’s free online service to find financing by browsing multiple loan products from a network of more than 75 lenders. Lendio will use the proceeds to grow their existing platform.

PeerIQ Conferences:

PeerIQ will be at LendIt Fintech USA 2020 – with a lot of hand sanitizer.

PeerIQ CEO, Ram Ahluwalia, will be speaking on May 13th at 3:15 p.m. Reach out if you’d like to connect!

Industry News: 

Lighter Fare: