Lackluster IPO shows subprime lenders still have hurdles to overcome

By Kevin Wack for American Banker

President Trump’s deregulatory push was supposed to be a bonanza for high-cost consumer lenders.

But that hypothesis was called into question Thursday, when shares in Elevate Credit debuted on the New York Stock Exchange at half the price the company had been targeting.

The Fort Worth, Texas-based online lender went public at $6.50 per share, and while the price had risen to $7.60 when the bell rang, it still sat far below the $12-$14 range that Elevate anticipated prior to its initial public offering.

The lackluster IPO suggests that stock investors still have misgivings about subprime consumer lenders, even though Trump’s election seemingly reduced the chances that Consumer Financial Protection Bureau will enact tough new rules that bite into the sector’s profits.

One potential source of investor concern is that consumer credit performance has recently been worsening in various loan categories, including credit cards, auto loans and online installment loans.

Elevate, which was spun off from Think Finance in 2014, offers installment loans and lines of credit to U.S. consumers. Last year the firm reported an effective annual percentage rate of 146%. Its median customer has a FICO score of around 580. The firm’s chargeoff rates are generally between 25% and 30%.

Another source of potential worry for investors is that Elevate relies on a partnership with a Republic Bank & Trust Co. in Louisville, Ky., to originate its line-of-credit product; such arrangements, which enable online lenders to get around state interest-rate caps, are facing scrutiny from the courts and state officials.

In an interview after Thursday’s IPO, Elevate CEO Ken Rees struck an upbeat tone. “As a CEO, my job is to build a great company. The IPO is one component of fueling that growth. The market obviously decides what’s the right price,” he said.

Elevate, which plans to use the proceeds from the IPO to pay off what it characterized as some relatively expensive debt, first considered going public in late 2015. The IPO was postponed amid weak investor demand.

More recently, the Republican election sweep appears to have benefited the subprime consumer lending sector. Shares in Enova International in Chicago have risen by 58% since Election Day.

In its pre-IPO prospectus, Elevate noted that if the CFPB issues final rules targeting payday and installment lending, its U.S. business may be significantly affected. Elevate also makes loans in the U.K.

The CFPB proposed the first-ever federal rules on payday lending in June 2016, but the proposal has been met by strong opposition from the industry. The CFPB is widely expected to adopt a more industry-friendly stance after Director Richard Cordray leaves, which will happen no later than July 2018.

Rees said Thursday that he believes that some form of rule on short-term lending will eventually be finalized.

“I think we’ve learned over that last few months that nothing is certain in Washington, D.C.,” he said.

But consumer advocates say Elevate’s products, which feature high interest rates and longer terms than payday loans, are a bad deal for borrowers.

“I think they exemplify why we need strong rules to protect people,” said Lauren Saunders, associate director of the National Consumer Law Center.