17% interest earned on interest-free loans
Certegy, a provider of merchant finance, is earning an effective interest rate of 17 per cent on loans marketed to consumers as "interest-free". In some cases the interest rate is as high as 65 per cent.
Aspects of Certegy's financial model emerged in reports published on Friday by credit ratings' agencies Fitch and Moody's in connection with the marketing A$133 million of asset-backed finance by FlexiGroup, which owns Certegy.
The Flexi ABS Trust 2011-1, as it is called, is a still rare instance of an asset-backed debt issue to the public market. FlexiGroup will price the securities, spliced into five tranches, later this week.
The securities are a somewhat novel investment option in the fixed-interest market, since securitisation structures typically involve assets where the debtor expects to pay interest on a loan.
In this instance, the stream of fixed repayment, over terms of up to five years, includes an implied interest rate dictated by the discount at which the merchant sells the receivable to the financier.
In their pre-sale reports for investors, Fitch and Moody's put the implied yield on this pool of Certegy loans at 17.3 per cent on average. One chart in the Moody's report shows that yields of between 20 per cent and 30 per cent are common and that, in some instances, the yield can be more than 30 per cent, and as high as 65 per cent in a handful of cases.
The pool refinanced through this securitisation accounts for about half Certegy's current asset base of $260 million, according to the ratings agencies. The pool covers loans to 12,000 customers.
FlexiGroup produces annualised cash earnings of $12 million from Certegy, a company presentation to an investor conference last month shows.
Buyers of solar panels account for one quarter of the loans in the asset pool, suggesting that repayments may be sensitive to the politics around feed-in electricity tariffs.
Other prominent merchant categories include jewellers and suppliers of fitness equipment.