RE:RE:RE:RE:Rough road ahead....shawshank2 wrote: Key there is originations are down significantly and will remain so for a year if not more imo. So if economy goes in the toilet it will be holding a ton of bad debt and no new income originations = breach of covenants on secured credit= equity to zero. This of course is worse case scenario but not a huge stretch in a continued recession
You understand that debt is lower than loans that are currently out, including a very large bad debt provision that's above current and historical levels? Including $41M of credit provision, the net "minimum" loan outstanding value (which has been reduced by $162M for unearned revenues) was $812M compared to borrowings of $719M. So even if they didn't originate anything else, from here until the end of the current loans, they'd be able to earn $255M (812 + 162 - 719) +/- the difference in bad debt scheduled of $41M and the real charges +/- the loss of unearned revenues on charge-offs and the value of the equipment they get. Compared to the current market price, there is a decent "buffer" from current loans outstanding.
Plus, the economy is already in the toilet right now. It can't get worse really. It's been improving slowly:
https://www.bloomberg.com/news/articles/2020-08-07/employment-in-u-s-increased-by-more-than-forecast-in-july. Trump just signed an act that will continue to inject money into the economy until the end of the year. The government can't suddenly stop their support to the economy or it would mean all the money and plans put forth so far were in vain.
Lower origination is a problem as you need a certain level of activity to pay the fixed costs of operating a business. However, on the other hand, it also strenghtens the quality of their clients credit, lowering the bad debt risk as time goes by.
The share price is already suppressed by 50% due to all these risks. If Chesswood wasn't risky, the share price wouldn't sell at firesale prices and it would be closer to $10. The risk means all who buy now get a discount of 50%. The question isn't is Chesswood risky, it's the balance of risk vs discount on the share value. Considering the very large provisions that Chesswood has already taken (on origination plus extra in Q1 2020). Current market value is approx $75M.
As to covenants, your take is just wrong. Equity = zero when net liquidities are below zero and you can't go to the market (share issue). Otherwise, it is in the best interest of the lender to waive covenants until the creditor finds an alternative lender or makes a share issuance. So, breach of covenants could lead to higher finance costs or share dilution. As to liquidities, Chesswood still has an healthy margin of about $18M per quarter, including the current bad debt provision at full rate (without any recoveries). Yearly, that's a $70M buffer over the $40M one for bad debt, for a total of $110M. That's the buffer before "equity to zero", as otherwise they'll find alternatives to their current lenders. That $110M buffer is 33% of payments that are owed in 2021. So there's plenty of margin for Chesswood at the moment.