The most notable item in the Prospa Group prospectus, which was released on Friday, is that the online small business lender’s impairment charge last financial year was the equivalent of 12.5 per cent of average gross loans. Another eye-catching number is its average interest rate last year – 24.2 per cent.
No matter how much this company spruiks itself as a fintech with great customer service and a sophisticated “credit decision engine”, in reality it is not so different from an old-fashioned finance company – a high-risk lender with lots of bad debts to chase.
Prospa is hoping that its initial public offering will raise $109.6 million, with an offer of 29 million shares at $3.78 a share.
The capital raising has two components: $49.6 million will be used to allow existing shareholders to realise some of their investment; and $60 million will be used to repay debt and invest in the business.
Existing shareholders, including the founders Greg Moshal and Beau Bertoli, will continue to hold 138.9 million shares, giving new shareholders a 13.9 per cent stake in the business.
Based on the offer price, the company has a market capitalisation of $609 million. The company expects that its shares will commence trading on the Australian Securities Exchange on June 13.
Prospa was founded in 2012 and since then has originated over $1 billion of loans in Australia and New Zealand. Its current loan book is worth $300 million. It claims to be Australia’s number one online small business lender.
Australian originations grew at a compound annual growth rate of 102 per cent between 2016 and 2018, and revenue at 106 per cent over the same period. The company moved into New Zealand last year.
Prospa’s business case is that small businesses are underserved by banks. It offers what it describes as “a range of fast, flexible cash flow finance solutions, with decisions and funding often made by the next business day.”
The company cites a net promoter score in excess of 77 to indicate that customer service is at a high level. It also points to the fact that around 68 per cent of “eligible” customers take out another loan.
It relies on a proprietary “credit decision engine” to deliver these quick funding decisions.
Prospa earned revenue of $104 million in the year to June 30 last year and made a net profit of $2.1 million. For the current financial year it is forecasting revenue of $136 million and a loss of $16.9 million. After adjusting for listing costs, the loss is expected to be $1.5 million.
The company earns its revenue from interest and fees, including late fees, servicing fees and interest on cash deposits.
The core offer is an amortising term loan for amounts between $5000 and $300,000 (unsecured up to $100,000) and terms of three to 24 months.
During calendar year 2018, an average Prospa loan was $28,832 at origination and had a term of 12.7 months. Based on a “simple interest rate” of 23.9 per cent, such a loan contributes $7500 of revenue and a net contribution of $3200, for a 42.5 per cent “contribution margin”.
Among the attributable costs of $4300 involved in originating such a loan, loan impairment is the biggest item.
Loan impairment was $26 million in 2017/18 and the company expects loan impairments of $32.2 million this financial year. Loan impairment to average gross loans was 12.5 per cent last financial year. If the impairment meets expectations in the current financial year it will be the equivalent of 10.1 per cent of average gross loans.
It expects originations to rise from $435.5 in calendar year 2018 to $559.4 million this year – an increase of 28.4 per cent.
The company says that as its loan book has grown it has been able to access more diverse funding at lower cost. This year it launched an updated rate card with rates ranging from 9.9 per cent to 26.5 per cent. It is forecasting that the average rate on its loans will drop from 24.2 per cent in 2017/18 to 21.2 per cent in the current financial year.
“In addition to enhancing our market penetration and growth prospects, we anticipate the new rate card will allow us to attract certain lower risk grade clients,” the prospectus says.
Since 2015, the company has been funded through a revolving warehouse and securitisation trust structure. The first funder into the trust was a fund managed by Carlyle Group, which subscribed for $45 million. In 2016, notes were issued to “a leading Australian institutional fund manager”.
At December last year, the overall warehouse funding limit of senior and junior notes was $195 million.
In April last year, an issue of asset backed securities, Prospa Trust Series 2018-1, was launched, with the same syndicate of senior note holders as investors. In December two more securitisation trusts were established.
The company is expanding its product range. In April it launched a line of credit, and it is testing a B2B payments service.
Twenty-nine per cent of sales are direct and the rest are through brokers, accountants and other intermediaries.