NEWT - NEWTEK Business Services Corp

[Maple Fun]

I am long NEWT. A bet on PPP loan and more government subsidized SMB loan in the future. Below are my quick notes.

 

About NEWT:

*Mkt cap=$287m@$13.79 as of May 13, 2020

*Internal managed BDC, fantastic 5-year/10-year historical stock performance with dividends reinvested

*CEO owns ~5%, rare for a BDC, insider buys in Mar to May

*Primarily SBA 7a loan originator, 2nd largest player in this market, average loan size ~$180k

 

Catalysts:

*They plan to write up to $1.1 billion PPP loan in Q2, will earn 1%-5% fees on the loan depending on the size [Five (5) percent for loans of not more than $350,000], no B/S risk

*Given their average loan size was $180,000, so they will probably earn close to 5% on the $1.1 B, let's call it as $40m, nearly 15% of current mkt cap

*NMS, one of their "controlled investment", is a highly profitable/high growth payment processing company (comp: nyse GPN)

*In the intermediate to long run, I expect that SBA will play a bigger and bigger role in the SMB lending market. NEWT is uniquely positioned to benefit from it.

 

 

 

 

 

[matts]

The offsetting risk is the losses hiding in their loan book. How are you underwriting those loses that will offset the PPP fee revenue?

 

I own the baby bonds, NEWTI and NEWTL as a safer way to play your thesis. about 8% YTM right now (was much cheaper when i bought it)

 

 

[Maple Fun]

The offsetting risk is the losses hiding in their loan book. How are you underwriting those loses that will offset the PPP fee revenue?

 

I own the baby bonds, NEWTI and NEWTL as a safer way to play your thesis. about 8% YTM right now (was much cheaper when i bought it)

 

As part of our coronavirus debt relief efforts, the SBA will pay 6 months of principal, interest, and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020.

[matts]

True. I'm mostly playing devil's advocate as i also own the common.

 

Why do you think the market is punishing the stock as they announce more revenue from risk-free PPP and get their SBA payments paid by the feds?

 

Is it just the fact that it's a "BDC" and people are not looking close enough? but then, who is selling? One thing i see on Seeking alpha is that many yield pigs hold this and are just nervous about their dividend.

 

 

[Maple Fun]

True. I'm mostly playing devil's advocate as i also own the common.

 

Why do you think the market is punishing the stock as they announce more revenue from risk-free PPP and get their SBA payments paid by the feds?

 

Is it just the fact that it's a "BDC" and people are not looking close enough? but then, who is selling? One thing i see on Seeking alpha is that many yield pigs hold this and are just nervous about their dividend.

 

I think some people are worried about 2021 and beyond.

[matts]

There will be loses in their book once the SBA stops making payments on behalf of borrowers. NEWT stressed their books at 30% gross default ratio and 40% severity (probably will be worse).

 

But offsetting that, looks like the SBA will have a larger role for years to come. NEWT will go back to writing SBA 7a loans. Rubio wants to up the 7a guarantee to 90% from the current 75%. If passed, that means more of the loans can be securitized and sold, leaving NEWT with less risk. NEWT also started a JV doing non-SBA loans, which thankfully was too new to cause major damage in this crisis and should get some good pricing going forward, IF they can underwrite the risk properly.

 

the SBA guaranteed securitizations should also get better pricing for the next little bit. yield and federal guarantee is in high demand.

 

New potential borrowers from their new referral programs at UBS and Stifel. Their "operating subs" are also very well positioned to be cross-sold to their loan applicants: online payment processing, POS touchless payments, Cloud storage, IT, cybersecurity.

 

 

[Maple Fun]

There will be loses in their book once the SBA stops making payments on behalf of borrowers. NEWT stressed their books at 30% gross default ratio and 40% severity (probably will be worse).

 

But offsetting that, looks like the SBA will have a larger role for years to come. NEWT will go back to writing SBA 7a loans. Rubio wants to up the 7a guarantee to 90% from the current 75%. If passed, that means more of the loans can be securitized and sold, leaving NEWT with less risk. NEWT also started a JV doing non-SBA loans, which thankfully was too new to cause major damage in this crisis and should get some good pricing going forward, IF they can underwrite the risk properly.

 

the SBA guaranteed securitizations should also get better pricing for the next little bit. yield and federal guarantee is in high demand.

 

New potential borrowers from their new referral programs at UBS and Stifel. They "operating subs" are also very well positioned to be cross-sold to their loan applicants: online payment processing, POS payments, Cloud storage, IT, cybersecurity.

 

WELL said, Matts! It was 90% guaranteed post-2008 crisis. I believe SBA will do the same thing this time. NEWT made a fortune in those days! Imagine a negative-rate world, these gov-supported SBA loans are The Jewel in the Crown.

 

Having said that, NEWT is still a lender and has substantial credit risk.

[ben267]

I think this is pretty useful for anyone considering investing in Newtek, but loans marked in a very weird way, some at 130% of par. Your BV could take a hit once you properly adjust for that. He highlights some other pretty good points too.

 

https://www.scribd.com/document/449777090/Newtek-Business-Services-Part-I

[matts]

I think this is pretty useful for anyone considering investing in Newtek, but loans marked in a very weird way, some at 130% of par. Your BV could take a hit once you properly adjust for that. He highlights some other pretty good points too.

 

https://www.scribd.com/document/449777090/Newtek-Business-Services-Part-I

 

I read it before and it seems like shoddy work. All these guys just pick things out of financial statements with no context and slap it into a 200-page paper with lots of exclamation points!!!!

 

In the latest q1 presentation newtek showed 2 examples of how they can get paid above pair even on a non-accrual loan. In addition to par, they might collect additional amounts under (not all in every case obviously) the outstanding interest, late fees on the interest, reimbursement of the legal fees, pre-payment penalty, "recoupment fee". Now I'm not saying marking a loan at 130% is correct, but it's not as simple as just screaming "IT SHOULDN'T BE ABOVE PAR!!!!". SBA loans require collateral over assets, business real estate, as well as a personal guarantee from the owners which ropes in their personal assets. And Newtek sits in a first lien position before the SBA on any recoveries. Recoveries are shared equally.

 

 

 

[Maple Fun]

TBH, this is way better than expected: 20%+ return in a few days....it's time to move on...SCBH: similar thesis, prob higher quality, lower valuation...