Positive Developments In The Taxi Medallion Financial Industry

Category: Credit Basics Published: Wednesday, 28 October 2015 Written by Super User

A lot has transpired in the taxi medallion/ridehailing arena the past few months, and as information filters in, it is providing an ever-broadening perspective on numerous important issues.

The momentum that ridehailing firms have thus far enjoyed has shifted. The freewheeling gold rush is ending, as more and more municipalities begin asking questions regarding rider safety and level-playing fields for taxis and ridehailing.

In Chicago, there is a growing movement for Uber (Pending:UBER) drivers to get chauffeurs licenses just as taxis must to pick up rides from major points in the city. Mayor Emanuels new budget calls for a 15% taxi fare increase. That would potentially help out cabbies who have lost some market share to Uber. It might also push more riders to UberX. Since Emanuels brothers company is an investor in Uber, this may be a carefully calculated move to make it appear he is supporting taxis when he actually isnt.

Meanwhile, medallions continue to trade in the mid-$200,000 range. Signature Bank of New York (NASDAQ:SBNY) reported offering 7 medallions for sale at $240,000. This should debunk short-seller claims that medallions being offered at $150,000 were somehow indicative of true market value when, in fact, they appear to be aberrations based on forced sales.

A judge in California ruled that the lawsuit classifying Uber drivers as employees must be heard by a jury. If Uber loses, and there is every indication that it may, it could be on the hook for tens of billions of dollars. Whats worse is that it could face another 49 lawsuits like this, one for every state in the union.

In Oregon, the labor commissioner made an administrative ruling that reached the same conclusion. While the opinion in not legally binding, it could be used to support that position should a case be filed, which it probably will some day.

Some municipalities have been fighting tooth and nail over whether or not Uber should be permitted. Austin had a big battle. So did Broward County. Cities and counties are concerned over the myriad problems that come with Uber.

Latest Insurance Concerns

New insurance issues have been raised, particularly in states like New York. Car dealers and banks are now getting caught in potentially ugly scenarios. As it is, drivers usually fail to disclose that they are engaged in ridehailing services to their insurance company. At this point, almost every carrier asks if a car is being used for such a purpose. Everyone knows that if they say yes, the carrier will refuse to bind the policy. Those who lie are subjecting themselves to having their policy voided should they have an accident and the carrier discovers the lie.

For car dealers, who both sell and lease vehicles, they are now dealing with clients who may come to them to get a car intended for rideshare. They will register it in their own name. The dealer, unaware of the misrepresentation, sends the contract to one of the big banks that usually handles auto financing. Later on, should the driver have an accident in which the car is damaged, the bank can push all the liability for the damaged vehicle back to the dealer for giving them a fraudulent contract. The dealer must then reimburse the bank, and get stuck with a damaged or totaled car. Since the drivers personal insurance will likely have been cancelled, the dealer wont get paid a dime - unless the ridehailing companys insurance kicks in, which only is applicable in certain circumstances.

Heres another ugly scenario. A driver leases a car for rideshare but does not disclose this to the bank. He earns some money and makes payments. Soon he gets a lousy rating and Uber drops him. He defaults on the lease payments, and the bank must repo the car. The bank, however, was never aware that the lease was for rideshare.

This is just the tip of the iceberg, and why cities and states need to put the brakes on Uber until all the issues get sorted out. In Missouri, theres legislation that if a lien is placed on a vehicle or if a vehicle is leased, the driver must return to the lienholder and get permission for that car to be used for ridehailing. But what about cars leased years ago?

Suppose there is a hybrid insurance policy but the car is destroyed. Who ends up paying back the bank? Auto dealers, banks, and financing companies, as well as insurance companies, should demand full disclosure from the driver. That means forms need to be changed so that ridehailing use is included on everything.

Suppose insurers offer hybrid policies to ridehailing customers. Then shouldnt standard FHV drivers also be offered the same policies? If not, then why should one group pay more than another? Does the FHV driver carry more risk because he drives more often, or does the ridehail driver carry more risk because he isnt a professional driver? What happens if a driver works for both Lyft and Uber and he has an accident? Which companys policy pays?

Portfolio Statistics for Medallion Lenders

Heres some information on two taxi medallion lenders. Bank United (NYSE:BKU) has commentary from its Q3 conference call, available here at Seeking Alpha.

BKU had $241 million in medallion loans. This is comprised of 265 total loans, collateralized by 577 total medallions, or an average of $418,000 per medallion. 94-95% of these loans are in NYC. Critically, management says the loans are performing well, and that cash flows are strong, with NO delinquencies. 80% are amortizing loans. Debt Service Coverage ratio is particularly robust, with 3% of the portfolio under 1.25x, and 46% over 2x.

Short-sellers are fond of saying that underwriting is exactly the same from one lender to the next. Clearly, this isnt true, given that Montauk Credit Union was seized by regulators, while no other banks were, and companies like BKU are doing just fine.

Over at Signature Bank of New York, the conference call told us:

In New York:
  1. $622 million of medallion loans, down from $628 million in June.
  2. 87% average LTV, based on individual medallions priced at $700,000 and corporate at $800,000.
  3. 1.2x debt service.
  4. $38 million (6.5%) are 30-89 days past due.
  5. $7 million (1.1%) are 90 days+, some of which probably had a payment or two recently.
  6. $6.5 million (1%), made up of 9 loans, are non-performing.
  7. 1 is in auction and should have no loss.
  8. 1 is being restructured as the driver was disabled.
  9. 7 could go to foreclosure. If all 7 were sold at $700k sale price, losses would total $200k. Thus, charge-offs are not materializing meaningfully.
  10. Utilization rates down slightly, but they dont have exact figures.
  11. Loss Reserves at 2%.
  12. Zero charge-offs.

Debt service coverage has not changed throughout this year. That tells us that things have stabilized.

Of course, the shorts will make hay out of this, but the numbers tell us a few things. First, 9% of the NY portfolio is under stress. But lets remember that delinquencies do not equal defaults, and defaults do not equal losses. Even if those seven medallions dont sell, and they will sell at some price, the total loss would only be $5 million on the entire portfolio, less than 1%.

Chicago:
  1. Worked through many issues, and Chicago is starting to stabilize.
  2. 753 loans, $171 million in balances, for an average of $227,000.
  3. LTVs are 95%, based on $240,000 price.
  4. 1.28x debt service.
  5. $110 million have been refinanced/restructured, to reduce cash flow stress on borrower, but SBNY takes amortization. Confident on repayment.
  6. $57 million refinanced in June and receiving all payments.
  7. $13 million currently being refinanced/restructured.
  8. $48 million paying, will probably restructure when due.
  9. $20 million are not performing.
  10. $12.8 million have been restructured and are paying.
  11. $3.2 in foreclosure.
  12. 7 already in a deal inked at $240,000 each.
  13. $4 million in workout.
  14. YTD, charged off $2.4 million, $500,000 of which was in 3Q.
  15. Reserves at 4%.

Again, $2.4 million of charge-offs represent 1.5% of the Chicago portfolio. Given that there are buyers at $240,000, this should totally wipe out any claims that $150,000 is somehow the fair market price.

Yet the key element that everyone is likely to miss is what happens when loans get restructured. Critics call this extend and pretend, as if this is somehow illegal or unethical or indicative that the loans will fail. Thats simply not true. Why do banks restructure mortgage loans? Because if they dont, then they have to foreclose and possibly get pennies on the dollar.

By restructuring the loan, in which the lender takes amortization, it means the borrower is PAYING BACK THE PRINCIPAL. Even if the lender foregoes all interest or defers it to the end, the point is to MITIGATE LOSSES. So even if the payments no longer contribute to earnings, it should be seen as a smart move that the lender is getting back as much as it can.

Its taken four years for Uber to be in NYC to see even this result. How much more market share can UberX take away from cabs? It cannot possibly be much more because everyone in New York City knows about Uber. If they havent jumped fully onto the bandwagon yet, they arent going to.



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