Is sub-prime consumer lending making a comeback?
Online lender Elevate Credit set the terms for its U.S. IPO on Monday, pricing 7.7 million shares at $12 to $14 each and establishing a 1.15 million share overallotment option. The company could raise up to $124 million.
Elevate targets the non- or sub-prime consumer, the customer that traditional banks usually won’t touch because they have low credit scores.
”Our customer is typically deeply frustrated with traditional banks, which have ignored their need for access to credit, fair pricing, and a path to lower rates and better credit,” wrote Ken Rees, Elevate’s CEO, in a letter in the company’s S-1 filing. “Even though non-prime consumers now outnumber prime consumers in the U.S., most fintech investments and innovation have largely focused on providing credit to prime consumers who are already swimming in it.”
As of December 31, 2016, the company’s three loan products had provided about $2.5 billion in credit to approximately 785,000 customers. Revenues for the year ended December 31, 2016, grew 34% to $580.4 million, up from $434 million a year earlier. Net losses for the years ended ended December 31, 2016, and 2015 were $22.4 million and $19.9 million, respectively.
When Elevate was first scheduled to go public in early 2016, the interest rates it charges consumers evoked some criticism. In the amendment to its S-1 on March 27, the company pointed out that it had cut the effective annual percentage rate for borrowers to 146%, down from 251% as of December 2013. While those rates are higher than what some other online lenders charge, Elevate said payday loans carry an APR of 400%.
Perhaps more worrying for prospective investors is that Elevate’s customers become delinquent on their loans at a relatively high rate. As of the end of 2016, the company’s net charge-offs as a percentage of revenues were 52%, up from 49% a year earlier. Provisions for loan losses were at 55% of revenues, according to the S-1 filing.
The other major risk factor for Elevate is that two of Elevate’s loan products are funded through a single source, Victory Park Capital. The company has a $495 million credit facility from the investment firm.
Its third product, a line of credit called Elastic, is originated through Republic Bank. Republic underwrites the loans and pays marketing and technology licensing fees to Elevate.
The company plans to list its shares on the New York Stock Exchange with a ticker of ELVT.
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