Bill Blain On Provident's Suprime Shock: "Can’t Get Much Worse You’d Think? Oh Yes It Can"

Tyler Durden's picture

By Bill Blain of Mint Partners

Blain's Morning Porridge

Provident Financial. What a mess. Is it an opportunity?

Provident has become the story of the week. In case you missed it: the stock has been hammered and its bonds are trading massively down on the back of multiple bad news bullets: an FCA investigation into the Vanquis credit card and loan repayment options, a failed new technology introduction and new staffing approach that caused a leap in defaults from 10% to 43% (!), suspended dividends and the departure of the CEO.


For years Provident was a respected name, secure in its niche supplying credit to the bottom of the UK credit pool. Its experienced independent door-to-door salesmen managed their clients pragmatically – a personal touch that kept defaults low and recoveries high. Earlier this year the model was turned on its head. The independent door-to-door guys were replaced by I-pad wielding scripted staff controlled by head office. The system appears to have collapsed overnight. Defaults soared.

The firm threw away control of its clients.


Provident has been described as “uninvestable”.

It looks like a case of classic management incompetence. Replace a tried and tested functional business model with something new that doesn’t work. But there is more to it. It should remind fixed income investors of the importance of cash-flow – and exactly how cash is collected and overseen. Years of experience has taught us that firms with a tight control of their credit processes and sustainable businesses are the ones to invest in.

Apply that test across your credit portfolio.

It’s a classic wake up and smell the coffee moment re any secured deal secured or senior debt based around cash flow generative business models. If you wish, apply the same model to High Yield, but make sure there is a defibrillator in the room first.

The second lesson is more general – Provident is not the only corporate in more trouble than we thought. This morning WPP is on the wires as tumbling global advertising revenues means a profit warning is merited. Which leads one to wonder what that might mean for firms like Facebook as the younger teen and pre-teen generations abandon the social media site because it’s for their grandparents.

Do not ignore the risks generated by trends and society… and just about everything else.. And, the recall the classic adage: invest in companies where you understand the model and are confident the management also understand the risks, the environment and the threats and can deliver.

I’m told Provident is secure – although its got a shed-load of debt coming due in coming months through to 2023 (over £1 bln with an average maturity of 2.34 years), the new management is confident it can cover the debt losses, and the likely FCA fine. It’s got bank lines in place to repay £120mm debt due in October.

However, the lesson of 2007 was collapsing confidence in a financial’s liquidity is what kills it. Witness Northern Rock – where it wasn’t afflicted by credit losses, but a drying up of liquidity. To recover, Provident will not only have to reverse the current credit losses, but also persuade highly sceptical market it is again investible. That is a 2-3 year process with a new management… not convinced it can happen. Alternatively, perhaps the major shareholders will step in to finance the firm through rehabilitation.

As the UK’s best known sub-prime lender spins into a death spiral, what are the implications for mainstream UK banks? The regulators are all over consumer lending like the proverbial cheap suit. There is a risk they will see the opportunity to impose greater hurdles on lending to “persistent debtors”. Bloomberg says 3 million UK credit card holders are in debt trap.

Can’t get much worse you’d think.. Oh yes it can.

The bottom line is the UK is debt-addicted. Provident may have had its flaws, but the model of door-to-door paternalistic lending worked. Who fills their boots? Therein lies opportunity – but it’s an area where regulators just can’t resist the urge to get involved. I can’t help but suspect the regulators are so keen to control and restrict sub-prime they’d rather see it stopped completely, rather than promote lending to the social classes that need it most. They’d rather starve the population than risk food poisoning…

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NickyGall's picture

We have central bankers to thank for this round of debt accrual.  They are willing to sell their souls to keep the economy firing.

spastic_colon's picture

in the US we have legions of mortgage brokers getting paid 2%+ on mortgages and making 300-1MM a year while real estate agents getting paid 3-7% on the transaction yet not a whisper of usury fees??  gotta protect that bastion of oligarch money laundering called real estate......

FireBrander's picture

Games, games, games....



1. Your business brings in $10,000 a month gross.

2. You charged $8000 on your credit card in order to make that $10,000.

3. Is your monthly income $2000 a month or $10,000?

The answer, according to a subprime lender I recently spoke with, is $10,000 a month.



1. Your only recurring debt is a mortgage payment at $2000 a month. The P&I is $1000 while the Taxes, Ins, Ect., is the other $1000 a month.

So, what is your monthly recurring debt?

SURPISE!, you're debt, according to the finance industry, is $1000 a month....they only count the P&I part of the payment.

That's what's going on out there...



In the finance world, your income is $10,000 a month with $1000 a month of're only at 10% of debt capacity.

In the real world, your income is $2000 a month with $2000 a month in debt...100% debt loaded.

Yeah, this is going to work out just fine...

spastic_colon's picture

so in the finance world lenders wont even sniff you..........but in the real world you'll qualify for a 120% LTV loan

Déjà view's picture

Debt addicted...4/5-Eyes...BOTTOM LINE...


196 AUSTRALIA -$33,200,000,000 2016 EST.
197 CANADA -$51,080,000,000 2016 EST.
198 UNITED KINGDOM -$114,500,000,000 2016 EST.
199 UNITED STATES -$481,200,000,000 2016 EST.

auricle's picture

Perhaps London will be the first to reach peak globalization. 

armageddon addahere's picture

"They are willing to sell their souls to keep the economy firing."


Sell YOUR soul you mean.

Silver Savior's picture

What do subprime lenders expect? They are loaning money to people with very few resources at a huge rate. It's only common sense. They have every right to have huge losses. No one should pay any of it back.

GunnerySgtHartman's picture

What do subprime lenders expect?

The same preferential treatment that the Wall Street bankers got.  Governments have already socialized their losses, so why not everyone else's losses?  Why should the subprime lenders expect anything less?  Not that any of it is "right," of course.

buzzsaw99's picture

ah, ye olde use-bank-line-of-credit-to-make-bond-payment-game.  yeah, that always ends well.  after all, those are secure lines of credit that never get yanked when one gets into trouble, right?  /s

Watson's picture

If I was thinking of investing in Provident debt, I would look to see how much business it did in Northern Ireland, particularly as a % of all such Northern Irish business.

Current politics in the UK is such that the current UK prime minister will bail the thing out,
rather than let it default on debt repayments - and leave her at risk from a backlash from the 10 or so MP's that keep her in power.

Of course, none of the above supports the share price...


Haitian Snackout's picture

So they had no appreciation of their face to face model or the skill of their employees. And didn't even have the common sense to test their new system first. I would guess those former sales people and collectors will be snapped up by their grateful competitors.

itstippy's picture

Apparently their former face-to-face debt originators and collectors were self-employed subcontracters.  Luigi and Guido had a 90%+ collection rate.  All was well.  However, bank examiners were starting to investigate the "independent debt collecters'" practices, and Provident had to get rid of them or try to explain the busted kneecaps and noses in court.  They were forced to change their business model, replacing Luigi and Guido with Norm and Casper, and replacing the ball bats with iPads.  Collections plummeted.

That's how I read it, anyway.

SubjectivObject's picture

spot the bang in bangk

CRM114's picture

There is no connection between Credit Rating and creditworthiness any longer.

Credit rating is simply a measure of the ability, under the current joke of a financial regulation regime, to make mass market profits.

There are now quite a lot of people with low credit ratings who are 100% good for their debts, and people with high ratings who will go under without much change in the current economy.