Articles by Sean Murray

The OnDeck Roller Coaster of 2020

“2019 was an important year for OnDeck and we finished strong,” said OnDeck CEO Noah Breslow in the year-end earnings call that took place on February 11, 2020. “Financially, we had our second full year of profitability. And strategically, we are making significant progress positioning the company for improved performance and even greater long-term success.”

OnDeck reported net income of $28 million for 2019 and its share price closed at $4.07 the day earnings were announced, giving it a market cap of roughly $240 million. This was down significantly from its IPO value of $1.3 billion, but up from the lows it had hit in 2017 and 2019.

Over the next 30 days, however, the price fell by 50% on fears that the looming novel coronavirus could cause catastrophic disruption. The company also announced the departure of its Chief Accounting Officer.

As the industry looked on with wonder, news coming out of the company seemed strangely at odds with reality. For example, OnDeck announced a “first-ever” NASCAR sponsorship on March 10th.

“OnDeck is proud to sponsor the JR Motorsports team and driver Daniel Hemric for races during the 2020 NASCAR Xfinity Series season,” said a senior vice president of marketing at OnDeck. “So many of our small business customers are avid motorsports fans and we look forward to joining them to cheer on Daniel and the No. 8 car decked out in OnDeck colors at the Atlanta 250 and the Chicago 300.”

On March 23, OnDeck closed at 70 cents. The market, it seemed, valued OnDeck at a paltry $41 million.

Publicly, OnDeck kept up the optimism. The company applied to be a PPP lender as the program was just beginning to roll out. “We are excited to be one of the fintechs delivering PPP loans as a direct lender,” Breslow said. “Our team has been working around the clock getting us ready and now we wait and hope we are approved soon!”

Simultaneously, the company suspended the funding of its “Core” loans and lines of credit to new and existing customers. The company then went on to report a Q1 net loss of $59M due to covid-related damage, wiping out all of its 2019 profits and more. It also furloughed many employees while reducing the pay for those that stayed on.

That same month, OnDeck’s management “commenced a review of potential financing options to secure additional liquidity and potentially replace [its] corporate line facility and began contacting potential sources of alternative financing, including mezzanine debt.”

The response it got was grim.

“The interest rates offered by those alternative financing sources ranged from 1-month LIBOR plus 900 basis points to 1,700 basis points (in addition to an upfront fee) and all but one required a significantly dilutive equity component,” the company later disclosed. “The one proposal that did not include an equity component was at an interest rate of 1-month LIBOR plus 1,400 basis points to 1,700 basis points.”

OnDeck engaged in negotiations with four potential sources of alternative financing, but two dropped out as the economic effects of the pandemic worsened. At the same time, it was speaking with Enova about something else entirely, a potential merger.

On the frontend, OnDeck was keeping the public abreast of its negotiations with creditors. The pandemic had put them in a technical breach of its terms with several of them but the company was experiencing some success with securing workouts and reprieves.

Regardless, the stock continued to trade below $1 as the world looked on to see what would become of their Q2.

On July 28th, bombshell news broke. Enova, an international lending conglomerate, announced it was acquiring OnDeck for the price of approximately $90 million.

“Following an extensive review of our strategic options, we believe this is the right path forward for our customers, employees, and shareholders,” Noah Breslow said on a call with Enova executives the following day.

Some shareholders had a different opinion and thought that the deal and the terms looked a little fishy, all considered. Nine different shareholder lawsuits were filed over the next two months with the intent to delay or block the acquisition.

How could this possibly be the best deal or the right path?!

That was the underlying question being posed between the lines of the various claims asserted. OnDeck ultimately settled with all the parties by releasing supplemental information to the public about its financial situation and thought process that led up to the Enova merger. All the objections appeared to fade as shareholders approved the deal by an overwhelming majority.

On October 13th, Enova announced that it had completed the acquisition of OnDeck.

But by that time, was OnDeck merely a hollowed out shell of its former self? Not quite, according to disclosures made two weeks later. Enova announced that OnDeck’s portfolio performance was already exceeding their expectations.

“On the small business side, the makeup of the demand is surprisingly similar to a year ago,” said David Fisher, CEO of Enova. “You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”

Fisher was also bullish going forward. “We believe now is a great time to be increasing our presence in
small business lending. The pandemic has devastated many small businesses across the country. Their
revenues are down and small business owners are digging into their savings to survive until the pandemic subsides and the economy reopens.”

Enova reported monster quarterly earnings of $94 million, a company record.

“Together Enova and OnDeck will be well positioned to further support small businesses and consumers in the wake of the pandemic,” Fisher said.

OnDeck Originated $148M in Loans in Q3, is Moving Full Speed Ahead Under Enova

OnDeck more than doubled its Q2 loan volume, according to statements made on Enova’s latest quarterly earnings call. OnDeck originated $148M in Q3 versus the $66M in originated in Q2.

For frame of reference, this is still down significantly from the $618M that the company originated in Q4 2019, well before covid became a factor.

But expect the numbers to ramp up.

“We have basically all of our marketing channels turned on across consumer and small business [lending],” said David Fisher, Enova’s CEO.

“OnDeck is probably a little bit ahead of where we are on the Enova side. We were a little bit more cautious in our re-acceleration of our lending kind of going into the 3rd quarter but we are totally comfortable with that decision. If the biggest mistake we make during all of covid is waiting an extra 60 days to re-accelerate lending, we think that’s a great position to be in. We think that extra conservatism makes sense and with the rate that we’re re-accelerating lending, it won’t hurt that much in the long run.”

And apparently demand and credit quality are looking quite normal, despite covid, according to Fisher.

“On the small business side, the makeup of the demand is surprisingly similar to a year ago. You would expect so many differences given what the economy has been through but there’s actually very very few. It’s pretty broad based. Credit quality look really really strong. If anything it’s stronger- I think it’s the stronger businesses that are trying to borrow at this point that are trying to lean into covid, not the ones that are just trying to survive so if anything on the demand there is a slight improvement on credit quality in small business.”

OnDeck’s annualized quarterly net charge-off rate for the third quarter was 23% and its 15 day+ delinquency rate decreased from 40% at June 30th to 27% at September 30th.

Enova reported monster quarterly earnings of $94M. CEO David Fisher and CFO Steve Cunningham said it was a record-breaking quarter for profitability.