NSF/Provident: not such a capital idea
Subprime lender’s assessment that a deal lacks prudence looks to be correct
Corporates spend millions on rebranding exercises. Any merger between companies named Non-Standard Finance and Provident Financial would require one of these. So far, however, the two sides have not agreed on much since NSF made a hostile bid in late February. On Wednesday, Provident explained why a deal with NSF lacks prudence. Frankly, that looks correct.
At first sight, combining these two UK lenders to folks with racy credit ratings looks like a rescue for NSF investors. These include prominent fund manager Neil Woodford, who is also a shareholder in Provident.
While revenues have tripled since 2016, NSF has not registered any profits after tax. That matters: retained earnings after dividends go into shareholders’ equity. Losses do the opposite. Provident has — apart from 2017 — made profits for years. It is also more than six times larger.
Partly due to its subprime loans, Provident must hold substantial common equity tier one capital (CET1) against its assets, nearly 30 per cent. But it also can accept deposits, which represents cheaper funding. All that looks pretty to NSF, which has had to raise money through equity offerings or expensive borrowing. It is not a bank, so watchdogs require no minimum amount of capital. Should it acquire Provident, that would change. NSF/Provident would need more money to cover a capital shortfall.
How much is moot. Subtracting intangibles and a dividend payment from the NSF shareholder equity puts the notional core tier one equity ratio at 16 per cent of assets. However, NSF has promised to sell a subsidiary, Loans at Home, to satisfy any competition concerns. Remove that equity and the ratio drops to less than 6 per cent. Provident has five times that proportion of CET1. On its pessimistic view, including any acquisition costs, the new group could need £130m. NSF argues that its all-share offer would raise a lot of equity, offsetting any capital shortfall. Its shareholders would face dilution, however.
They might prefer that to waiting for a turnround. The Provident side is right to brand the deal a loser.