FGNA - OppFi SPAC

[Spekulatius]

So, I listened to Bill Brewster’s business brew podcast and he has an episode where he interviews Jared Kaplan from OppFi. OppFi is going public via a merger with the FGNA SPAC this year.

Bill and Jared  talks a lot of about OppFi business, which caters to subprime customers and why it is a good value proposition for them. Anyhow, I looked at OppFi’s pre IPO numbers and almost can’t believe how profitable it is, to the point where the numbers are  absurd:

https://www.sec.gov/Archives/edgar/data/0001818502/000119312521135035/d135342dprer14a.htm#tx135342_22
 

The numbers are almost absurd. Their revenue is about equal to the size of their balance sheet, which means APR is around 100%. ROE is about 200%. they bumped up their equity from $37M to almost $100M through earnings last year. last year was probably a best better than average due to stimulus preventing defaults on their extremely low credit worthy customers but even befor thwt, the numbers look quite Impressive. Quite frankly, what I don’t understand is why they are going public at all (you don’t really need to raise external capital with this profitability) and Joe the customers don’t default en masse with the type of loans. This is not really addressed in the podcast, but the filing shows the profitability so unless this is all fake or not repeatable, it is one of the best business I have ever seen.

 

The FGNA SPAC is launched  by Kyle Cerminara and Larry Swets (which I understand some have mixed feelings about), but are well known in fintwit for their BTN involvement #lumbergang.

(No position yet).

 

 

[Lakesider]

Looks like a pay day lender where they lend money short term and charge a huge interest rate. These were very popular in the UK a few years ago until the government capped the rate they could charge in a big way. When people couldnt pay back the loans they ruined lives. 

Goverment enforced rules.  
"Borrowers pay no more than 0.8% of the amount borrowed per day, and a maximum of 100% of the loan in fees and charges."
 

Edited May 9, 2021 by Lakesider

[Spekulatius]

This is a pretty good Twitter thread on the “True Lending rule” from the Trump administration that made life easier for subprime lenders that operate across many states:

Repealing this rule could impose some additional regularity cost for lenders like OppFi, but it is not clear how much that would affect the bottom line. OppFi tried to sell itself as Fintech, but it really is a deep subprime lender. The profitability and growth has been mind boggling - they basically 10x their size and equity (equity growth from $9M to $99M) just through retained profits. I don’t care how you call this, if it is that profitable, it is probably the best business I have seen ever.

Of course there is the catch, if something is too good to be true, then it typically is. I suspect as this grows in size, someone takes a close look at it and then the problems start.

 

It was mentioned in the podcasts is that their Glassdoor reviews (4.4*) and BBB rating are pretty good. The Glassdoor reviews look a bit generic and it is clear that management or HR is looking very closely at them. The high number of reviews in Glassdoor (~190 reviews for ~500 employees) suggests that management is managing Glassdoor postings too.

 

I searched in the Apple App Store and didn’t find and App for AppFi or Apploans. Strange.

 

Fascinating to see how this plays out.

Edited May 9, 2021 by Spekulatius

[bizaro86]

Yeah, if you owned this business and those numbers were real why on earth would you go public? Shining a light on how profitable you are just invites both regulatory scrutiny and competition, and you don't need the extra capital anyway.

[CorpRaider]

Interesting that CEO flagged USB as having a competitive offering.

Edited May 10, 2021 by CorpRaider

[hasilp89]

On 5/9/2021 at 11:06 AM, Spekulatius said:

Repealing this rule could impose some additional regularity cost for lenders like OppFi, but it is not clear how much that would affect the bottom line.

Passed the senate and looks likely to pass the house and be signed. Still unclear to me what impact it will have on these guys. Would assume it makes their business more difficult as they navigate regulations state by state. Makes transitioning to other products even more neccesary?

 

On 5/9/2021 at 3:09 PM, bizaro86 said:

Yeah, if you owned this business and those numbers were real why on earth would you go public? Shining a light on how profitable you are just invites both regulatory scrutiny and competition, and you don't need the extra capital anyway.

This is a great question. The optimistic take after listening to the CEO is that they don't expect or want this business to be an installment loan business in 10 years. They genuinely care about customers and want to transition the business over time. Their target demographic is huge (interesting to me that people who bank/deposit with a WF/BOFA can't get a loan from them - i'd assume they'd start banking with the guy that does give them a loan and from there do a lot more - wait are we talking about the WF cross sell here ). There are a lot of banking/financial services that can be sold to them. Being public and having skilled professionals on board with you is the right way to do that. The Skeptical take - they know they can't lend like this forever without the regulatory hammer coming down - being in the public markets gives them the best exit possible with current SPAC froth. 

@wabuffo Have you ever looked at this? Interested to hear your taken given your financial services / banking expertise.

[wabuffo]

Have you ever looked at this? Interested to hear your taken given your financial services / banking expertise.

I have not.  But they look like a grubby payday lender dressed up in flashy fintech livery.  What am I missing?

wabuffo

 

[CorpRaider]

That’s where I got on it (admittedly little work).  Maybe a bit better than those title companies that were all the rage years ago. They do seem to place some of the risk with regional and small banks.  I always think like low end financials are scary because reported figures look amazing until they blow up (and timeframes for incentives are really, really not aligned).  I do acknowledge the spac sponsors seem like super smart subprime finance guys.

 

but hey affirm reinvented lay-away.

Edited May 14, 2021 by CorpRaider

[hasilp89]

1 hour ago, wabuffo said:

Have you ever looked at this? Interested to hear your taken given your financial services / banking expertise.

I have not.  But they look like a grubby payday lender dressed up in flashy fintech livery.  What am I missing?

wabuffo

 

Pretty much what I thought as well. . From reading and listening to interviews though:

-The people involved make me wonder if they are setting up to be something more than a GPLDUIFFL (Grubby payday lender dressed up in flashy fintech livery ). I wouldn't think Joe Moglia (well respected coach and CEO of TDameritrade) and Kyle Cerminara would want to get involved with something un-reputable. Additionally I've listened to a number of interviews with the CEO. Didn't come across as the kind of guy who wanted to be remembered as a GPLDUIFFL. 

-NPS scores (if real) are pretty phenomenal. They claim to have very happy customers which i wouldn't think would be the case for a typical loan shark. 

-Have begun the move into payroll deduction lending (30% rates)

-Launching a credit card.

If this demographic can't get loans from a WF/BOFA (and it seems like there are unfortunately a lot of them in the US) isn't a transparent, regulated, bank partnering platform a good market solution? Especially if consumers are happy with them.

[wabuffo]

If this demographic can't get loans from a WF/BOFA (and it seems like there are unfortunately a lot of them in the US) isn't a transparent, regulated, bank partnering platform a good market solution?

These guys take the worst of the worst credit risks and charge them 60-100% APRs.  There's very little operating history here - and what little there is was buoyed by three rounds of stimmie checks, which I have no doubt helped with losses.  I just don't know if they've really been stress-tested yet.

And to top it off - they made an interesting accounting change just-in-time for the SPAC.  I noticed that their loss provisions seemed to improved markedly in 2020 vs 2019, 2018.  In 2019 total provisions were ~50% of revenue but in 2020, they improved to ~31% of revenue.  That accounts for the big increase in net income.  What explains that much improved performance?   Is their AI getting better at assessing credit risk?  Nope - its good old fashioned change in accounting methods!

Cop a squint (and I mean you really have to squint) at the footnotes.

What this means is that historically, OpFi reserved the expected losses over the life of their loans due to their short life.  But in 2020, they are adopting a different methodology which uses a fair market value -- whatever that is.  So you have to take this change into account as the results are not directly apples-to-apples.

At this point I just throw my hands up in the air... because I don't think I can understand their economics.

wabuffo

Edited May 13, 2021 by wabuffo

[Spekulatius]

^ I assumed the lower provisioning was caused by a better than expected loan losses due to stimulus checks. I don’t know if they arbitrarily  juiced their results.

 

Frankly, I don’t care, if what they are doing is good for society or of it is fintech or a grubby payday lender. If they can lend at ~100% APR (which is what their income statement and balance sheet suggests) and lever it just 2:1 and  keep loan losses to a manageable 30-50% () this business prints money like no other.

I do think that there is absolutely no reason to sell a business it’s economics like this, so I assume some sort of regression is going to happen and the folks selling the business know this.

 

I think I just keep watching this post deal and see how the business goes. Perhaps I take a flyer on the warrants if they are cheap enough.

Edited May 13, 2021 by Spekulatius

[hasilp89]

Thanks @wabuffo I saw the lower provision. I assumed it was stimme checks and didn’t read that footnote on different methodology. 

9 hours ago, Spekulatius said:

I don’t know if they arbitrarily  juiced their results.

Not sure I can say this with certainity. Will watch from the sidelines for now.

 

 

 

[wabuffo]

I don’t know if they arbitrarily  juiced their results

I'm not saying they did.  But it does seem.....uhh....less conservative.

wabuffo

[CorpRaider]

JPM WFC USB and "others" announced an initiative yesterday to share data to try and serve subprime customers better and issue credit cards to people with no FICO scores (using this data in underwriting).  Seems like an endorsement of that aspect of their model (obtaining and using this "alt" data from the customer bank account), but also potentially more competition. 

Edited May 14, 2021 by CorpRaider

[Spekulatius]

What a time to be alive - AMA session with Kyle Cerminara regarding the FGNA- OppFi SPAC.

So far, he has dodged my question ( or wabuffos ) why they switched to fair value accounting on their receivables.

[Cigarbutt]

^If interested, Enova (ENVA), which is a relevant 'fintech' loan intermediate comparable, integrated the fair value rule for loans receivables starting Jan 1st 2020.

Their 2019 supplemental financial information found in their investor relations' section shows an interesting pro-forma picture (page 11). There is also an August 2020 presentation that can be found by Google (no longer on their website it seems) which has two pages on the issue (pages 38-39), rationale, accounting effect etc.

Interestingly, ENVA recently announced that their annual meeting was being postponed in relation to an auditor selection..

-----) Back to a great time to be alive and $$FGNA$$

[Pelagic]

Thanks for the link to AMA.

For those who want the Reddit style tl;dr this is probably the best post in it as Kyle goes into a pretty good explanation as to what he sees as the range of values for OppFi

(Ok that the new forum automatically embedded the post is pretty cool!)

I'm a little confused on why the shares outstanding isn't a known quantity? Why is it potentially 80 or 120 million?

[Spekulatius]

I think the variance is sharecount is somewhat normal with the potential for earnout shares, warrant's and sometimes redemptions, but in this case, the range is large. Kyle somewhat explains why in his AMA.

[Spekulatius]

FYI:

 

[ContrarianValue44]

I absolutely think that this company has the potential to be at least a three-bagger by 2024 and at least a five-bagger by 2026.

 

Reasoning:

 

Management's projecting $254M of 2023 EBITDA, this could be $400M for 2025 in my opinion (26 percent EBITDA growth rate for 2024 and 2025).

 

At 10x EBITDA (a very reasonable multiple and only slightly higher than today's 8x EBITDA), the market cap would be 2.54B in early 2024 and 4B in early 2026 - 200 percent and 400 percent upside respectively. 

 

15x - 20x EBITDA might even be more reasonable (and is more in-line with competitiors), which could make the market cap as high as $8B - 900 percent upside by early 2026.

 

Shares outstanding may go from 80M to 120M depending on earnout shares, warrant's and redemptions. However, usually these are not activated in full, so a share count between 90M and 100M may provide a more accurate picture. So, yes, there will likely be some dilution, each share in 2023-2026 will likely only have a "slice of the company pie" that is 80-89% of that of a share today.

 

Adjusted for dilution, there is 220 percent upside by early 2024 and 380 percent upside by early 2026. That's at a 10x EV/EBITDA multiple, at 20x there's 780 percent upside by early 2026.

 

So the upside seems to be very attractive. And as mentioned earlier the business model seems to be generating strong returns and tremendous growth. It is also lead by capable highly prestigious management.

 

But let's discuss the downside. This mostly relates to regulation risk. OppFi has really been the target for numerous lawsuits, including the current one against the company from the District of Columbia (DC).

 

Amigo Loans (a company in the same industry, but in the UK) has been suffering heavy pressure from UK regulators on what regulators claim are predatory processes to the UK's poorest borrowers: https://amp-theguardian-com.cdn.ampproject.org/v/s/amp.theguardian.com/business/2021/may/25/amigo-loans-shares-dive-high-court-compensation-fca?amp_js_v=a6&amp_gsa=1&usqp=mq331AQHKAFQArABIA%3D%3D#aoh=16236759700421&referrer=https%3A%2F%2Fwww.google.com&amp_tf=From %1%24s&ampshare=https%3A%2F%2Fwww.theguardian.com%2Fbusiness%2F2021%2Fmay%2F25%2Famigo-loans-shares-dive-high-court-compensation-fca

 

Needless to say, the company's stock price has fallen from 2.5 pounds a share to 8 pence (0.08 pounds).

 

What is to stop these kinds of regulation from entering the US and also destroying OppFi's business model? Both Biden and his nominee to the Consumer Financial Protection Bureau (CFPB) Rohit Chopra seem to be poised to take bold action on the matter soon. Chopra "has spoken out strongly against what he sees as predatory lending practices, in areas from education finance to payday loans." https://amp-ft-com.cdn.ampproject.org/v/s/amp.ft.com/content/d2b62fc8-b759-4ab5-9067-16db399b0232?amp_js_v=a6&amp_gsa=1&usqp=mq331AQHKAFQArABIA%3D%3D#aoh=16236762519614&referrer=https%3A%2F%2Fwww.google.com&amp_tf=From %1%24s&ampshare=https%3A%2F%2Fwww.ft.com%2Fcontent%2Fd2b62fc8-b759-4ab5-9067-16db399b0232

 

What are the communities thoughts on the risk and reward of OppFi based on what is discussed above?

 

Many thanks! 

 

Looking forward to any further updates @Spekulatius