Finally! Some real analysis from (of all places) the cesspool that is the Yahoo message boards.

A poster named Paul.Madsen offers up these gems regarding one player in the taxi medallion financial industry.

“[Company X] has large lending exposures to the taxi industry, but this industry will recover and stabilize, and in a stressed situation, even if the loan portfolio drops in credit rating to that of a single B nature, that would be a mean default rate of say 2% (PD).

Assume a 50% loss given default (LGD) you are looking at a 1% loss in a 677 million USD portfolio, which would be 6.8 million.

This loss is a thru a cycle credit loss, which is using the mean default rate.

TAXI generates around $28 million in earnings, which 1 year could easily cover this loss. LGD is a very stressed # at 50% given loan to values which provide protection, and historically this portfolio has performed well and a B rating is very low for this portfolio which would have been a BBB weighted average portfolio.

I believe that the lending portfolio will continue to perform at an acceptable rate, even in a stressed condition with net investment income of 22, and with continued growth in other commercial loans, the net investment income should be 23-25 million at least for next year.

This implies stability and much less stress than what is being noted.

Also, once the shock of car app companies subsides, the portfolio’s perceptions will be reviewed with much less risk and the stock should stabilize as a high yielding constant growth perpetuity. My valuation using the Gordan’s dividend discount model I come up with a value of around $13.17 per share, which is a 17% premium to book value. 

For previous years there have never been any losses related to medallion loans, but various car apps have started 2 years ago and have become more prevalent as of now, operators that are experiencing cash flow issues are now showing up, but the total past due taxi based loans total 12.6 million (page 12 of 10K).

Historical experience on small businesses would indicate about 50% of those will default. resulting in around 6 million in loans. This is only the loans in Taxi’s direct book (does not include the loans in the bank) 

Loans in the bank will be either better quality or of the same nature, assuming that 6 million in defaults there is also possible. Given an estimated 12 million in defaults over 667 million in loans results in a 2% default rate, the corresponding letter grade would be B. 
Note: All of this is a stress based credit analysis, If a new normal operating conditions for taxi operators is setup, the stress losses will decrease and historic mean performance or something close should return. Also, the LGD is based upon leveling out of declining values in medallions, assuming foreclosure, legal costs at 5% of value, a 50% LGD is conservative and would normally be much lower, historically there LGD was 0%.”

An excellent analysis that skeptics should take note of, but probably will not.

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