The impact that the interest rate caps proposed by the SARB will have on micro-lenders is something that I don't want to speculate on. I do however want to understand the impact that the proposed cap on interest rates will have on Transaction Capital, seeing as much of their income is generated via financing taxis (SA Taxi). Now there are a few differences between financing assets (like taxis) and unsecured lending. Firstly, in the case of Transaction Capital's SA Taxi, they are doing asset backed lending. Which means that they have an asset to repossess if all goes wrong. Secondly, they are granting what is classified as Developmental Credit. This is because they are essentially financing small businesses and not just cars/taxis. Each taxi they finance belongs to an entrepreneur and is operated as income generating assets which is why they fall into the Developmental Credit criteria. Now if we look at how the proposed regulations impact this type of credit and subsequently how this impacts Transaction Capital, we see the following:
- SA Taxi can loan currently at a max interest rate of 32.65% (although their pricing ranges between 18% and 26% to average 24.6% yield). The proposed regulations in fact increases the cap on interest rates on Developmental Credit to 32.78%. Which means that if they wanted Transaction Capital could in fact charge a higher interest rate on their taxi finance deals. In other words the new regulations will have no impact at all on their EBITDA (seeing as they are well within their max limitations already - and the cap is being increased). So if they wanted to be greedy, they could probably squeeze a bit more margin out of it.
- In terms of initiation fees, the current max for Developmental Credit is R2500, and the new proposed max is R2600. Again, higher and again in Transaction Capital's favour. But as they only originate about 6700 to 7000 new credit agreements each year, impact on EBITDA will be low.
- As for monthly service fees, the new regulations increase this from R50 to R60 for Developmental Credit. So with 24 500 accounts, the impact on EBITDA will also be rather negligible. The key is here that the nature of the credit is to stimulate economic growth and social upliftment, and not get consumers spending. In other words, this is 'good debt' that is used to start and run small businesses.
Bottom line is, the proposed regulations by the SARB will do no harm whatsoever to the earnings capabilities of Transaction Capital. Worthy of note also is that a while ago Transaction Capital sold Bayport. Did management see the train coming and got off the tracks in advance?
We must not forget that Transaction Capital also has MBD within it's stable. MBD does debt collection both as principal and as agent. Which means that they both buy debtors books in their own capacity and collect on the debt, and they collect debt on behalf of other institutions. This is a tricky business to understand, but from what I understand various 'unsecured lenders' NEED them to collect on their debt. I say need, simply because Transaction Capital is the biggest player in the field (in SA) and is often the only one that has enough cash to buy or collect on these bad debt books. Now there was a recent ruling about garnishing orders in the courts that could have one worry about the impact this will have on debt collectors. Here economies of scale again work in Transaction Capital's favour. Less that 1% of MBD's total monthly collections come from this EAO collecting mechanism as MBD rather makes use of the good old fashioned call centre method. Once again, this will have a negligible impact on EBTIDA, as Transaction Capital is largely unaffected by the recent court ruling.
So when I look at this whole situation and the recent developments, I see a company that is well positioned to succeed while others might start to feel the pinch of court rulings and proposed new regulations. It appears to me that the management team foresaw much. I guess this makes me a bigger bull than ever.
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