Vpc Specialty Lending In... Share Discussion Threads

[pete_bane] 12/5/2020 08:29

Unlike SpectoAcc whose exegesis we await with bated breath we should consider securities whose payoff is based on ST converted into units of domestic currency at a fixed
exchange rate, X¯. Such a security is called a quanto. We will consider quanto forwards and quanto optionsand price them within the Black-Scholes framework. Quantos are traded very frequently in practice, particularlyin the structured products market. Consider, for example, an option on a basket of three stocks: IBM, Toyotaand Siemens. The three stock prices are denominated in USD, JPY and EUR, respectively. But what currencyshould the option payoff be denominated in? Suppose we choose US dollars but we don’t want any exchange rate exposure. Then a call option with strike K might have a time T payoff given by
PayoffT
:= max (0, c0IBM0 + c1SIET + c2TOYT − K) (15)
and we say that Siemens and Toyota have been quanto’ed into US dollars. More specifically, we can also rewrite
the payoff in (15) as
PayoffT
:= c0 max
0, IBM0 +
c1
c0
SIET +
c2
c0
TOYT −
1
c0
K


which can now be interpreted as c0 call options on a basket of IBM, Siemens and Toyota with a strike of K/c0
and where Siemens and Toyota have been quanto’ed into US dollars at fixed exchange rates of c1/c0 and c2/c0,
respectively.
Another market where quantos are frequently traded is the commodity market. Most commodities are priced in
US dollars but non-US investors often wish to trade commodities denominated in units of their domestic
currency. For example, a European investor who wishes to buy an option on crude oil but without the
USD/EUR exchange risk could buy a quanto option where the oil is quanto’ed into EUR. For example, a call option on oil with strike K and maturity T would normally have a time T payoff of max(0, OT − K) which is
denominated in USD since the oil price, OT , is denominated in USD. If the option is quanto’ed into Euro,
however, then the payoff is again max(0, OT − K), but now it is denominated in Euro despite the fact that OT
is denominated in USD.

[jefftim] 11/5/2020 21:00

Yieldsearch I agree that it is difficult to work out how VSLs investment companies are performing. Presumably the drop in the investments value is down to the likes of Elevates stock value trading lower although it has picked up again. Year high of about 6 bucks, a low of a buck, and currently around the two buck mark. Might have been higher if not for the insiders selling the day before the Elevate results came out.

I am guessing that much of the NAV of VSL is the amount of cash loaned to the likes of Elevate. As long as Elevate keep paying the interest (and perhaps some of the capital) then VSL can argue that there is no need to make big allowances for non payment etc. The actual NAV will only take a hit in the event that the likes of Elevate are unable to make payments to VSL.

From the Elevate Credit Inc quarterly figures released last week.
Net loss for the three months ended March 31, 2020 totalled $(4.9) million, down $18.3 million compared to $13.4 million in net income in the first quarter of 2019. Basic and fully diluted loss per share for the first quarter of 2020 were $(0.11), a decrease from $0.30 per fully diluted earnings per share a year ago. (About $10m was a right down on Goodwill on the UK operations so not an actual cash expense)

As of March 31, 2020, 4.7% of customers have been provided relief through a COVID-19 payment deferral program for a total of $26.4 million in loans with deferred payments. As of April 30, 2020, 10.8% of customers have been provided relief through a COVID-19 payment deferral program for a total of $53.4 million in loans with deferred payments. (Elevate will be offering/allowing deferrals for up to 180 days. At the end of this time clients will either have to start paying something or default.)

Both we and the bank originators are closely monitoring early credit quality indicators such as first payment defaults, deferred payments and line of credit utilization. We have also seen a slight increase in delinquencies and expect an increase in net charge-offs as compared to prior periods. Both we, and the bank originators we support, have implemented underwriting changes to address credit risk associated with originations during the economic crisis created by the COVID-19 pandemic and have reduced loan origination applications and loan origination volume since the beginning of the COVID-19 pandemic. The portfolio of loan products we and the bank originators provide has experienced decreased demand in the US and UK as the COVID-19 pandemic began impacting those markets.

Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response, including assessing our minimum cash and liquidity requirement, monitoring our debt covenant compliance and implementing measures to ensure that our strong liquidity position is maintained through the current economic cycle. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during the remainder of 2020 is highly uncertain.

While we are closely monitoring the impacts of the COVID-19 pandemic across our business, including the resulting uncertainties around customer demand, credit quality, levels of liquidity and our ongoing compliance with debt covenants, there can be no assurance that the COVID-19 outbreak and its effects will not materially adversely affect our financial position, and our access to capital, to the extent we need additional liquidity, may be constrained due to disruptions in the capital markets and financial markets.

[waterloo01] 11/5/2020 20:10

Thanks. Some great posts. Excellent insight.

[redhill9] 11/5/2020 16:55

Thanks Yieldsearch, I appreciate your point and also for taking the time to reply.

I agree that there isn't the level of detail available for us to do an impact assessment of varying scenarios on income and therefore dividend sustainability, and of course I recognise that VPC don't give any forward guidance specifically about dividend sustainability.

However, it was through reading the quarterly letter that I was persuaded that VPC had satisfied itself on the stress testing, had put itself in position of control over it's portfolios (so far as is possible/reasonable) and in particular that the default experience up to early May was satisfactory, that the portfolios were generating high cashflow, that VPC's exposure was being closely monitored with the ability to flexibly manage their positions, and that they were actively looking at redeploying cash into opportunistic scenarios.

All of that I'd agree is taking on trust what management have said and cannot be checked! They may be premature in their optimistic comments about current default experience, they may also be wrong in their comment on being conservative in having recognised future losses, and they may be over-ambitious in their intentions on beneficially re-deploying cashflow. It will be good to read the next monthly update as there should be more clarity presented on actual experience and I may wait until then before increasing my holding further but, as I think SpectoAcc mentioned earlier, there's a lot of downside already in the share price

One final point regarding your closing comment - Would "applying the expected/ anticipated unemployment rate as default rate across all the loan portfolios" as you suggest provide a meaningful view of the impact on VPC's net income due to the structure of the relationship with portfolio companies whereby the companies (mostly) absorb the first loss on defaults and VPC then only taking a hit if the portfolio company then fails, and then only after winding down the portfolio?

[yieldsearch] 11/5/2020 15:38

redhill9 your post 386:

I meant that we don't have any sensitivity analysis released by the company in relation to default rate, loss rate, delinquencies, impact of provisions etc.
Using an example:
Assuming pool of 100 loans (from say elevate or others).
current scenario all loans are performing, paying interest and repaying principal. all good.
Now stress scenario: say X% defaulting. Clearly no interest receipt on those. but because this X% defaulting, likely that it will create Y% of provisioning (unlikely to recover always 100% of the principal lent).
This Y% is therefore using part of the interest that we were supposed to receive (and remember, this interest receipt is now on 100- X%).
So basically what is X% and Y% that is triggering dividend cover falling below below 1.0.
then on top of that what is the impact of unhedged portion (initially hedge 100% of USD into GBP, now really we only have 100-X%
Also assuming defaulting the loans paying the highest amount of interest,what is the impact on the dividend.

I just dont know if this can sustain 1% default, 5% default or 20% default rate. and what is the historical default rate.

Pls dont get me wrong. the quarterly letter is miles better than some others companies (actually amongst the best out of all the credit listed companies in London). However i just cannot have a view of the level of dvd cover vs the level of stress the loans can sustain.

Applying the expected/ anticipated unemployment rate as default rate across all the loan portfolios and see the impact on the net income and dividend would be a start.

[chucko1] 11/5/2020 15:00

@Specto, you are correct, I think. But what is slightly odd is that two of these aliases were rather more stupid than the bulk. That is in no way intended to flatter the bulk who seem to have run out of useful things to do in their life(s?).

[redhill9] 11/5/2020 14:53

Thanks SpectoAcc, filter applied. As you say, the time it must take to uptick all his own posts must take ages - no doubt it gives him pleasure.........

[spectoacc] 11/5/2020 14:50

Ha ha yes - I could list all @Johnwig's multi-handles but would take ages. Suffice to mention pete_bane, humphbumph, chuckol, ltcm1, harijan, kpo115... Imagine remembering all the passwords, and spending your days logging in/out to uptick your own inane posts. Suspect badly bullied at school but now has his own "gang".

VSL - last director buy on 31st March so def due.

[redhill9] 11/5/2020 12:17

Should I assume that the rush of upticks for Humphbumph indicates he is one of the pete_bane, etc clones?

[redhill9] 11/5/2020 12:14

SpectoAcc and Yieldsearch, I wondered too at the recent lack of share buying at the reduced sp, either by directors or the company. Any resumption would be a very welcome indicator!

[redhill9] 11/5/2020 12:12

Yieldsearch, you make some valid points of caution and concern in your posts this morning.

Just a quick response regarding your comment...based on the info we have, we cant assess income so cannot really test dividend cover.... I think you'll find reference in the Quarterly Letter to all interest payments having been received to the end of April. Early days admittedly, but reading the detail in the Letter does indicate the flexibility of portfolio management that gives me encouragement income can be maintained, particularly the references to new lending and new business opportunities.

I remain optimistic based on what I'm seeing in that Letter but welcome reading your contrarian opinion.

[spectoacc] 11/5/2020 11:26

Agreed, I took it as a sign of impending bad news, was surprised! Did they enter a closed period, and what happened also to the buybacks?

Again - largely agree with you, downside more than possible, not everything priced in because it never is. But much more than I thought is.

[yieldsearch] 11/5/2020 11:05

@ SpectoAcc
Yes we could have good short term performance and new lending, but I guess delinquencies will start to increase from June/July if government subsidies are ending. but again that's just my negative view. based on the info we have, we cant assess income so cannot really test dividend cover. i just dont know

I don't see this as a yield play, really an asset recovery play however both linked obv. Directors and insider have bought until the 19th March/31st March, nothing in April at the lowest point. A renewal of director/insiders purchase should be a good indicator of asset value.

[humphbumph] 11/5/2020 10:44

Yes, people like SpectoAcc and Chucko are assuming that this latest small upwards correction validates their previous nonsense investments. They believe they are Masters of the Universe once again. I'm very afraid their day of reckoning is not so far away.

PS In truth they've already had a massive day of reckoning, but, unbelievably, they have chosen to ignore it. They're already in the lifeboats: the next wave, and it doesn't have to be a big one, will be final.

[chucko1] 11/5/2020 10:26

Hey Sefton, please don’t confuse that moron with me! Just saying, although I probably wholeheartedly agree with what you wrote and why you wrote it.

[spectoacc] 11/5/2020 10:01

@Yieldsearch - valid points. Will the divi even be covered? Might it be cut? All possible (but bear in mind what the yield is atm!).

Some of the debt relief will be flowing back to VSL in cash for reinvestment, on potentially much better terms. Then there's the asset-backing, the "first loss" platform set-up, and the performance so far.

But agreed - this could turn out far worse than the 2008 scenario they've modelled, with "US unemployment may already be 25%" mooted, and some permanent stickiness/changes to behaviour.

Again tho - how much is in the price vs 88p NAV?

[yieldsearch] 11/5/2020 09:57

Redhill9 & SpectoAcc

Is this level of dividend sustainable?
The debt relief currently provided is hiding the true state of the consumer credit sector. see for instance

the debt relief is temporary and the real delinquencies levels will feed through in a few months.
The well documented increase in unemployment will eventually have an impact in the economy.
The largest position (Applied Data, Elevate) are focusing on non prime borrowers. While new technology may be able to find strong borrower with non prime attributes, it is quite likely that those borrowers will not perform well in a downturn.

[redhill9] 11/5/2020 09:43

SpectoAcc, yes, the concern that things could get (much) worse in the US and elsewhere is a real one but I was encouraged that VPC have apparently already taken provisions against a further severe downturn. Two quotes from the update:

Our accounting is the same standard used by commercial banks to determine the level of losses estimated to occur over a 12 month period depending on a range of scenarios.

and

Given the current circumstances and ensuing uncertainty over what the next 12 months might look like, we have revised our modelling assumptions to reflect a 100% likelihood of a stress scenario, which assumes a significant level of incremental stress beyond the amounts witnessed thus far and comparable to loss rates on similar asset performance during the 2008 Financial Crisis. Our updated reserves reflect the possibility that some of these portfolio companies may default in the future under such adverse scenarios (hopefully this is not the case), and there is some probability we may not fully recover on the investment.

Also, it seems apparent that VPC have some considerable flexibility in managing their portfolio exposure, and that cashflow turns over very quickly as much of the financial exposure appears to be shorter term than I'd expected. At the current share price I think the risk/reward looks attractive.

[chuckol] 11/5/2020 09:16

I think you may be whistling in the dark, Specto. I sympathise with you because you've already taken a huge hit here(and in another dozen or so similar shares). I mean wouldn't it be better if you confronted the sad fact that a drop of over 50% odd is a massive blow to your portfolio, such as it is now.

I think, for the time being at least, you should take that temp job as a Queue Marshall at Morrisons.

[spectoacc] 11/5/2020 09:04

@redhill9 - exactly how I read it too. Also note it was up to early May, so eg the (terrible) US jobs number last week was already largely accounted for.

But that's not to say things can't get worse - 30 US States now reopening, that could go horribly wrong. Most of those are States where Covid hadn't taken a grip yet. Then there's the aftermath, even if you assume Covid is overplayed, won't come back in a 2nd wave, won't cause renewed lockdowns.

How much is the asset-backing worth, in a market where that becomes relevant?

And yet... how much is in the price already, with a NAV of c.88p?

More than happy to hold, whilst being paid to wait.