Business finance company Earlypay has suffered a heavy blow from the failure of its biggest secured borrower, with a A$9.6 million specific provision tipping it into loss for the six months to December.
Earlypay had an exposure of $29 million to building materials company RevRoof Pty Ltd and a related entity, Painted Steel Technologies, when they appointed PKF Melbourne as voluntary administrator in December.
Initially, Earlypay said it had a “strong security position” and expected that the outstanding exposure would be repaid in full.
But last week Earlypay announced that it had revised its expectations and accepted that it will not recover a significant portion of its exposure.
The company has accepted that the exposure was “outsized” and it has taken steps to limit single borrower exposure.
In addition to the $9.6 million RevRoof provision, Earlypay also reported $3.1 million of specific provisions and $1.4 million of general provisions.
With total provisions of $14.1 million for the half, compared with $716,000 in the previous corresponding period, Earlypay made a loss of $5.4 million. Its profit in the previous corresponding period was $6.9 million.
The board said in a statement: “Thorough investigations have identified the root cause of the loss and changes have been implemented to our corporate risk governance framework, underwriting process and decision-making, and operational policies and procedures.
“It also reinforced the need to continue to invest in our proprietary software and data infrastructure and retire less sophisticated legacy systems.
“Importantly, the RevRoof exposure was outsized relative to our loan portfolio and net assets. We have significantly reduced or maximum single borrower exposure limit to $10 million, which now largely aligns with our next largest client exposures.”
Earlypay also reported that funding costs resulted in a decline in net revenue, despite a big increase in funds in use.
Average funds in use rose 40 per cent to $343 million. Net revenue of $21.2 million was 6 per cent down on the previous corresponding period.
Earlypay chief executive James Beeson said the funding pipeline was strong for the rest of the financial year but funds in use would decline due to the RevRoof situation.
Beeson said he would focus on refinancing the company’s funding arrangements to reduce funding costs and generate a higher margin.