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Analysis & Comment  > Bond of the Week

Bond of the Week: 25 March 2015

International personal Finance  5 7/8% 2022

    

International personal Finance (IPF), a FTSE 250 company, has launched its second retail bond. It is rated BB+.
 

Issuer

International Personal Finance plc

Guarantors

IPF Holdings Limited

International Personal Finance Investments Limited

IPF International Limited

Format

Senior Unsecured, Unsubordinated, RegS

Bond Rating

BB+

Subscription Period

19 March to noon 8 April 2015 (may close at short notice, subject to RNS announcement)

Settlement

14 April 2015

Maturity

14 October 2022 (7 ½ years)

Size

GBP [TBC]m

Coupon

5.875% p.a., semi-annually in arrear ACT/ACT

Listing

London Regulated Market and the London Stock Exchange Order book for Retail Bonds

Sales Restrictions

UK, Channel Islands and Isle of Man only

Denoms

GBP 100 (minimum subscription GBP 2,000)

Lead Manager

Canaccord Genuity

ISIN

XS1205758219

SEDOL

TBC

ORB TIDM

TBC


I refer you to what I wrote last time on 13th April 2013 and again on 5th November 2013, when there was a subsequent tap.

IPF operates as a lender of small, unsecured cash loans to those who might not be able to borrow from the banks. With a headquarters in Leeds, the company operates wholly outside the UK in the developing markets of Central and Eastern Europe and Mexico. The reason IPF does not supply consumer credit in the UK is that it was spun off some years ago from Provident Financia, with the understanding that IPF would operate abroad and Provident Financial would concentrate in the UK.  The modus operandi of the two companies, other than where they conduct their business, is very similar. Indeed the CEO of IPF said that the directors of both companies meet quite often and if in doubt they just copied what Provident did. Given Provident’s share price is up 40% in the last six months I suppose that is not a bad strategy. I should add here that by the strange workings of fate Provident has just announced post IPF’s launch that they are also doing a retail bond (another BOW will be done on that issue). I suppose in this case the directors of Provident have followed IPF rather than the other way round.

IPF’s model is to lend from about £100-£2,000 for a period of about 14 months. The principal is paid pro-rata along with interest, as with a mortgage, so that there is no balloon repayment at the end. Generally money is collected in person by one of their 30,000 agents (yes that number is correct) and on a weekly basis. It is important to emphasise here that at the point the loan is taken out fixed payments are arranged and no subsequent charges are levied in the form of fees or penalty interest if the borrower gets behind with payments. Indeed IPF expects their borrowers to have the odd hiccup with repayment. That there are no penalty charges, puts a great divide between IPF and the likes of Wonga. [I should add here that they also operate a much smaller on-line credit borrowing facility where penalty interest does apply but the interest charged is much lower. For example in Poland a typical loan of Euros100 for a period of 60 weeks would require total repayments of Euros190. However, on-line Hapi (!)Loan would require a payment of only (if that is the right word) Euros160. Credit checks for Hapi loan customers are more stringent. Perhaps surprisingly ninety percent of customers who are given the choice between the two opt for the more expensive home collection service.

The initial credit vetting is carried out by the agents who are incentivised to be cautious by their commission being paid on collections and not on loans made. Not unreasonably they will be reluctant to make loans where they will have to make time consuming repeat visits to customers where no money is collected. IPF are proud, perhaps especially given that they operate in a somewhat murky business area, of various awards they have won: Top Employer Award 2014 in Poland, Excellence in Customer Service Award 2014 Hungary, Czech Republic Golden Purse Award (their purse/ customers gold?) etc. 

Profits have grown steadily as follows:
 

2007      2008      2009     2010     2011     2012     2013     2014
£51m     £76m     £62m     £92m   £101m  £95m    £118m  £124m
 

During this period impairments have held fairly steady in the 25-30% range (28.1% in 2014). Return on equity is 23.6% for 2014. Like Provident Financial, they borrow long, lend short. 95% of receivables are due in less than a year but 85% of borrowings are for more than a year. This is a major positive for bond holders. The business consistently throws off a lot of cash and that cash has not only funded growth but has also been enough to finance share buy backs. The equity to receivables ratio (ie portion of balance sheet funded by equity) is 47.5%. If you view that as equivalent to Tier 1, then that is extremely high.  Their geographical exposure is as follows: Poland-Lithuania £441m, Czech-Slovakia £529m, Hungary £438m, Mexico £272m and Romania-Bulgaria £342m. Finally, here is an interesting table showing where their revenue goes:

Agents’ commission   11-12%
Impairments                25-30%
Interest                        6%    (eg this bond)
Direct expenses           30-35% (i.e. their 8,000 employees)                           

Profit margin               20-25%          

Bar the oil bonds, IPF’s own issue and that strange Indian film company Eros, this bond offers a healthy yield premium to what is available and it has come 1/8% above the original indicated  range of 5 ½% to 5 ¾%. What might an investor want to consider or where are the weak spots? First and foremost there has been a problem with the Polish regulator (they have been fined) and that I believe explains (along with a business denominated in Euros and a share price denominated in sterling) their rather dilatory share price – they have certainly not kept pace with Provident financial. (The second I write this I see the share price has shot up 10% based on a buy recommendation!). As I understand it the regulator has fined them for breeching usury laws. IPF says they are on the point of agreeing a new compliant product with the regulator. Perhaps rather complacently they also say they have a very strong case and anyway they can keep on appealing the fine for quite a few years into the future, there is no interest on the fine and most importantly they cannot receive further fines for carrying on doing what they were doing that caused the fine in the first place.

I would also note that in order to appeal to shareholders, IPF have gradually been increasing their gearing. A move from an equity ratio of 50% to 40% would boost earnings from 47% to 59%. I wrote in April 2013 that their equity to debt ratio was 58%, in Nov 2013 I said managements target was for a ratio of between 50-55% and now they have said they target a 40% ratio. I hope they stop there. I assume the desire to maintain the rating will act as a constraint.

Conclusion. IPF have been slightly unfortunate in coming to the market at the same time as Provident and a proposed charity bond. IPF came first, so it is misfortune not maladroit timing. This almost certainly explains the extra 1/8% on the coupon. It is also true that the name does not appear to be one that easily flies out the door. That may be because, unlike Provident Financial, they are 1 notch below investment grade; it may also be that unlike Provident they operate in far-away places of which fund managers know little - except that picked up on a stag weekend. However, to at least some degree, the rather unsuccessful tap issue that knocked the premium pricing of the previous issue left just a faint smell, but one that lingered. The retail bond market has a long memory. Therefore I am not sure that this bond will trade at a huge premium post issue. Nevertheless on a risk reward basis it is fairly to cheaply priced. I had been going to recommend the equity as an alternative to the bond but post its sudden jump I am less confident. On the other hand the 10% share price jump might alternatively put some oomph behind the bond and mean a purchase will have a greater chance of capital appreciation.

Oliver Butt is a Partner in City and Continental LLP, a leading independent broker in fixed income. The author and or the LLP may hold a position in or trade in any of the securities mentioned above.

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