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Digital near-prime lender seeks 'breathing spell' through Chapter 11 bankruptcy

A fast-growing online specialty finance company that touted its "dedication to Big Data" as a competitive advantage in underwriting consumer installment loans filed Dec. 16 for protection under Chapter 11 of the U.S. Bankruptcy Code.

Chicago-based Argon Credit LLC co-founder and CEO Raviv Wolfe said in a bankruptcy court declaration that "liquidity issues" caused the company, which offers 12- to 60-month loans in amounts ranging from $2,000 to $35,000 to borrowers with credit scores above 540 at annual percentage rates of between 19% and 95%-plus, to miss a payment under a $37.5 million credit facility. The issues emerged in the aftermath of a spike in loan defaults that transpired during a time in which it had transferred servicing functions to a third party.

"The Debtors need the brief breathing spell provided by this bankruptcy case to restructure its indebtedness to the Senior Lenders and vendors and preserve value for all stakeholders," Wolfe said.

Fintech Financial LLC and Princeton Alternative Income Fund LP, Argon Credit's senior lenders, have asserted liens in substantially all of the company's assets following the payment default.

Argon Credit and Fintech Financial entered a $20 million loan and security agreement in May 2015. Fintech and Princeton then entered a master assignment of loans agreement regarding the periodic transfer of rights to the loan referenced in the loan and security agreement. The amount of the revolving facility was twice increased, most recently in February.

Argon Credit issued a release in May 2015, saying that it entered a $75 million debt facility with a "credit hedge fund" for the purposes of facilitating the acceleration of its growth in near-prime and prime consumer loan originations through its online platform.

"The demand of the consumer has outgrown the ability of the commercial banking industry, and opportunistic lenders that attract and retain these clients will find great success in this new marketplace," Wolfe said in that release. The company touted its "dedication to Big Data," analytics capabilities and management's background in the mortgage industry as advantages in managing risk and developing "innovative" solutions. It relies on "proprietary algorithms" to make decisions on loan applications and to identify the relevant risks.

As part of the negotiations on the credit line, Wolfe said Argon Credit engaged an unnamed third party to service the company's portfolio to permit it to focus on improving back-office functionality, decreasing lead times and improving efficiencies through better automation.

"However, after the Loan Servicer started to service the Debtors' portfolio, problems began to appear with regularity including a) refinancing or loan increase requests would take at least three weeks to process, well beyond the lead times previously provided to customers by the Debtors, b) first payment loan default rates soared from 4% to 12% as life of loan projected default rates increased from 24% to 34%, c) customers who had consistently made 8-10 payments stopped paying, and d) a significant number of new customers failed to make a first payment in spite of the Debtors' underwriting guidelines remaining unchanged," Wolfe alleged.

Argon Credit brought the servicing function back in-house in September, and Wolfe said default rates on the portfolio have since "meaningfully" declined.

A review of Argon Credit's Chapter 11 petition finds that the company has more than $41 million in unsecured claims, including nearly $37 million associated with the Princeton fund that it classified as contingent, unliquidated and subject to setoff. The company also included claims of $1.9 million by Fintech Financial and a $1.2 million claim by St. Petersburg, Fla.-based Peraza Capital and Investment LLC.

Wolfe indicated that Princeton's Dec. 7 notice of default stated that an Argon Credit affiliate failed to provide "full and accurate financial information" under the loan agreement. Princeton has assigned its rights in the agreement to Fund Recovery Services LLC, he added.

Argon Credit maintains a loan portfolio with net value of more than $36.5 million, Wolfe said. In addition, the company said it is holding approximately 300,000 leads with a potential aggregate value of at least $5.5 million. Wolfe said Argon Credit's loan issuing and servicing platform "can be sold as a 'turn key' operation" and/or used for the purposes of third-party loan servicing. But Wolfe warned that the transfer of the servicing function to an outside entity would negatively impact the market value of the loan portfolio "by at least 20%" as a result of the "significant interruption to borrower repayments" that would occur.

Through the Chapter 11 process, Argon Credit will seek to stabilize its operations and demonstrate to vendors that it can still operate in a profitable manner, including through a proposal to make monthly payments to its senior lenders toward accrued interest at a non-default rate.

Wolfe said Argon Credit generated total revenue of more than $6.1 million in 2015, up from less than $137,000 in 2014. From the time of the company's 2013 inception, Wolfe said, its origination volume has exceeded $50 million, with a customer base largely comprising "near-prime" borrowers who have "limited access to credit."