Orchard Funding Share Discussion Threads

[cc2014] 02/2/2024 12:27

I have a different question.

Consider you are providing the gap insurance.
You charge £500 but your average payout is only £100 for claims and £100 to the car vendor.

You get paid the £400 at the beginning of the policy after paying the car vendor so have a huge pile of cash.

So, why is it you need to borrow any money at all whether from Orchard or anyone else?

[topvest] 02/2/2024 12:21

To be fair there is some margin of safety...

"Over 98% of customer receivables are subject to recourse to the introducing partner in the event of default by the borrower".

Tangible net asset value 83p.

[konradpuss] 02/2/2024 12:02

No quite different in my humble opinion.

[spob] 02/2/2024 11:50

safety / margin of safety

semantics

[konradpuss] 02/2/2024 11:47

spob, I have always thought of this share as a quasi bank. Look at what the company can lose. If the punter stops paying the insurance policy is canceled. O.K. I was not expecting a regulatory issue.

By the way property assets can also go down big time. Just look at valuation impairments
on offices recently and retail/shopping centres over the last few years.

By the way safety is different from a margin of safety.

[spob] 02/2/2024 11:38

.
Margin of Safety ?


This company has borrowings and loans.

Basically risky business.


If you want safety, look for campanies with low risk tangible assets.

Liquid assets, Freehold properties and lots of Cash.

[konradpuss] 02/2/2024 11:33

topvest, I still think there is a margin of safety to get your money back if you entered at say 40p ish in the medium term.

[topvest] 02/2/2024 11:28

Anyway, this has been a poor investment for years now. Thankfully a very small position, but it always hurts!

[topvest] 02/2/2024 11:26

There RNS didn't imply there was any regulatory issue, just a lack of business volumes in the lending book.

If there ever is a compensation issue (and I think there may well be) it will be on the commission payments paid by the insurer in my book (i.e. similar to motor finance lenders). When you buy GAP insurance the contract is with the insurer and then includes a finance company. So, the primary company initiating the contract is the insurance company.

[davidosh] 02/2/2024 11:26

I think it is inevitable that ambulance chasing lawyers will be all over this and establishing who they can reclaim all the excessive profiteering from. Hopefully we are only reasonable cost finance providers and not paid or received any commission or caught up in the firing line.
Just defending our position could be costly but hopefully we may gain long term if seen as a reasonable option for those who still want competitively priced gap insurance.

[babbler] 02/2/2024 11:14

The dividend if any is likely to be cancelled now.

[34adsaddsa] 02/2/2024 11:07

I don't have any legal training at all, I could be completely wrong, but if Orchard thought there was no chance they were on the hook for any potential repayments and had a purely financing role then I think they would have hinted at that.

[34adsaddsa] 02/2/2024 11:05

I agree, but the loan isn't just a random personal loan to the consumer. It's linked to the insurance and the loan repayments are the cost of the insurance to the consumer.

Hopefully Orchard could then immediately get any repaid money back from the insurance company/dealer - as long as they have the money - but it gets very messy if that isn't already guaranteed by the contracts.

[spob] 02/2/2024 11:00

.
Anyone still buying this 'No Brainer' ? Lol

[topvest] 02/2/2024 10:57

No I don't think so, but its more complex than motor finance. The only liability really in my mind is for the underlying insurance contract, in this case which was over-priced due to a commission payment to the dealer. When you buy GAP insurance the contract is with the insurance company. You have presumably then taken out a loan to buy the product if you didn't pay the premium upfront. The issue isn't the loan it's the insurance product which is inflated by a 50% commission. The main party that has benfited is the dodgy salesperson in the garage, but this is on the back of the insurance company. The lender just earns their 10% finance charge, I think. It seems to me that motor dealers are having some generous commissions ripped away from them in the future. It explains why they are never interested in you buying cars for cash!

As with motor finance mis-selling, if they ever go for mis-selling here it will be the insurance companies who are to blame as they paid the commission and over inflated the price. The dodgy sales person always seems to come off best...he has spent his bonus!

[benny shares] 02/2/2024 10:53

When does the dividend get paid?

[playful] 02/2/2024 10:41

The FCA clearly require changes to the way insurers price premium finance products and to be honest I think we might have an opportunity here to break up the monopoly as they don’t have any issue with the product.

[34adsaddsa] 02/2/2024 10:39

If the consumer has been making payments to Orchard then surely the consumer would expect any repayment to come from Orchard.

Orchard would then in turn have to pursue repayment from the insurance company or dealer.

Do you disagree?

[topvest] 02/2/2024 10:37

The consumer. "Over 98% of customer receivables are subject to recourse to the introducing partner in the event of default by the borrower."

[34adsaddsa] 02/2/2024 10:14

Who are Orchard getting their money back from: a company or directly from the consumer?

[topvest] 02/2/2024 10:05

I very much suspect that the party that pays the commission will be liable for any mis-selling unless they also go for insurance premium funding as well. I believe that this is the insurance company. They get paid by Orchard and pay out a commission to the dealer on day 1. Orchard then get their money back with interest over a year. It is pretty clear that the insurance company is getting the outsized return which allows them to pay a 50% commission. That's why they are stopping it. No mainstream insurers are involved in GAP insurance which is also a red flag.

[playful] 02/2/2024 09:59

A good overview….

Speaking to the risks, the group as explained specialises in insurance premium funding, which in the UK is dominated in a duopoly, with Orchard Funding a distant 3rd player. These top players are Close Premium Finance and Premium Credit, which according to various online resources, control over 90% of the market. In the article linked, Bexhill describes competition in the market, with an interesting barrier to entry being broker commissions paid in advance for exclusive use along with multi-billion dollar spend on integrating themselves into the broker network to make the choice seamless. Bexhill goes on to propose the potential for price fixing with so few competitors. For some context, in 2022 Premium Credit generating a 54.7% pre-tax operating margin, whereas Orchard Funding generated a 33% operating margin. Pressure from the regulator (also here) could bring this disparity more in line, and assist Orchard in gaining more market share, along with a better margin. In my view, the odds are reasonable that Orchard could benefit from a future alleviation in competition, but there is also substantial risk of being dominated by incumbents. In the shorter term, funding costs are likely to put pressure on the group’s margin, but with the short-term nature of their loans, should see a relatively quick response in their lending rates.

[florence141414] 02/2/2024 09:54

If I was 100% certain that they were not on the hook for the legal action and the only risk is loss of business then I’d be buying as much as I could at these prices.

Even if they had to shut everything down, pay pack loan facilities and incur redundancy costs etc. presumably there would still be at least 15m of shareholder funds remaining.

Who knows what would happen then. Returned to shareholders? Bought out by Ravi for 10m?

Unfortunately I don’t think anyone knows for sure if Orchard have any liability until it is tested in a legal setting. Including Ravi.

[topvest] 02/2/2024 09:52

This summarises the position well -
hxxps://cardealermagazine.co.uk/publish/fca-effectively-banning-car-dealers-from-selling-gap-insurance-from-february/296699

It is consistent with what I experienced. I purchased GAP insurance on an £80k car online for about £200. BMW wanted something like £400-500 if I remember correctly. The issue again is like motor finance commissions. There is nothing wrong with the product itself. The issue is the enormous commission that the dealer gets for selling an overpriced product which means that they are knowingly selling an over-priced product.