RIFCO HISTORY since rifco is now almost 20% of gross receivables, good idea to look into history. read last several years of financial reports and can see why chw were able to get the business at the price they did. rifco shareholders exhausted with poor management execution. however, this could be a very good transaction for chw. history of rifco:
hyper growth hit a brick wall in 2015, helped by hot oil patch and its reliance on alberta market. stopped suddenly in 2015.
2015 annual report – missed all KPIs. grew too fast, couldn’t service loans properly, energy industry turned down and Rifco was caught as its book was overexposed Alberta and landscape became much more competitive with new entrants underwriting loans very competitively. Share price down from $5 in 2014 to <$2 in 2015.
for next three years, things just got worse. appears to be case of growing too fast without enough geographic diversification (too Alberta centric) and adequate infrastructure to support the growth, in addition to underwriting skill (or lack of).
2016 annual report – “This was a difficult year for the company. Our exposure to energy producing provinces significantly impacted our ability to achieve loan origination volumes and to achieve targeted credit performance.” Share price $1.17
2017 annual report – “While the management is determined to deliver corporate improvement, due to the overhang of the Energy sector economy, our current financial results are below our expectations.” Share price $1.55
2018 annual report – “Our efforts toward analytics and overall profitability, combined with improved credit performance and the opportunistic purchase of the third party loan portfolio will contribute to our turnaround and a significantly improved year” Share price $1.09
2019 annual report - “From this observer’s viewpoint, it certainly feels that the ‘less than prime’ auto finance industry is at a turning point. Benchmark borrowing rates have materially increased over the past year, likely resulting in some restriction of liquidity for non-bank originators. Credit performance in Alberta remains significantly challenged…a number of small and midsize competitors have ceased originations. With Rifco’s balance sheet, size and reputation, this turning point may provide novel opportunities…Rifco’s platform has been rebuilt and is now starting to take advantage of its investments in data and analytics. Increased volume at increased credit spread is already being seen. Rifco is on its way to delivering the financial results its stakeholders expect and deserve.” Share price $0.90
2020 annual report (ending March 31, 2020) –“ Originations increased 25% to $108 million, the company’s highest origination year since 2015…A treasury reorganization resulted in significant interest savings, increased treasury flexibility and better matching of borrowed funds compared to the underlying finance receivables.”
the business had steadily gotten smaller by early 2020, with no ROE to speak of and just spinning wheels. some progress was starting to be made but too little too late for the company.
exhausted shareholders find a buyer in Feb 2020, as Rifco enter into a definitive arrangement agreement with CanCap at $1.18 per share. Covid then appears and not surprisingly:
March 27, 2020 – CanCap terminating takeover due to Material Adverse Effect (Covid)
July 20, 2020 – deal terminated with Rifco getting $1.5 million.
October 2020 – concerned shareholders look at oust management and directors.
December 2020 – directors replaced, CEO also removed and replaced by shareholder Jeffrey newhouse
April 2021 – credit officer Roger Saran promoted to President while Newhouse remains as CEO.
August 2021 – Members of management propose a buyout at $1.18 per share. CEO Newhouse steps down to focus on AutologiQ his private biz in ontario.
finally, chw appears and pays another couple of million dollars ($1.28 per share) more than mbo price. And voila, chw owns Rifco.
So are rifco results currently a disaster? No. showing good improvement. as for covid, delinquency and loan losses did not increase vs the pre-covid periods. examples of recent improvement:
From 2016-2019, delinquency rate hovered around 5-6% (% of loan receivables). past three quarters, it has averaged 2.8%
From 2016-2019, originations in any given quarter didn’t exceed $29 million. the past two quarters, they have been $34 million (last quarter) and $31 million (last quarter -1).
From early 2016 to late 2019, quarterly credit loss rate steadily went up, from 4.55% to a high of 7.7% in q3/19. the last 2 quarters, it was 3.95% and 4%. (all are % of loan receivalbes)
In fiscal 2016 and 2017, financial expense ratio (cost of funds) was a little over 4%. then climbed to just under 5% on avg from fiscal 2018 to fiscal 2020. It has fallen for the past 5 consecutive quarters and is now 4.35%. it is this line item that chw could help to bring down asap.
credit spread rate spent most of 2018-2020 between 9-11%. In four of the past five quarters, credit spread rate is above 13% (and other quarter was still above 12%).
Credit spread is financial revenue less credit losses, then deduct financial expense to get to an operating margin before deducting operating expenses (people, rent, overhead) to reach pre tax income. in most recent quarter, credit spread of 13.5% offset by credit losses of 4.04% and financial expense of 4.35% to get to operating margin of $4.7 million. deduct operating expenses of $2.6 million gets reported pre-tax income of $2.1 million. Chw shud be able to reduce financial expenses (cost of funds) and some overhead (no public company cost, etc.) initially. keep in mind when consider that chw paid just $28m for the entire business.
isn’t risk-free but chance of chw and its shareholders realizing a good return on this acquisition is quite high imo. Rifco seems to have addressed a number of their weaknesses and built a more stable platform. this came at a high cost to rifco shareholders over several years and clearly wasn’t done rapidly enough. but chw’s timing appears to be good, and if it can bring down rifco cost of funds and augment underwriting team with its own best practices, hard to see how not very accretive when viewed thru prism of purchase price ($28m). interesting that new management were willing to put up their own capital to take private in 2021, usually tells me there is value when those closest to biz want to buy. other point of interest is the cash holdback as part of the rifco securitized debt – a big figure $18.9 million. don’t know enuf about this but could chw renegotiating funding for rifco allow some of this freed up. (holdback is part of securitization facilities to protect against risk of prepayment and credit losses, so securitizers maintain a cash holdback account in trust).