Nonprime borrowers are often forced to choose from the "roach motel" options of financial products, but Elevate Credit Inc. tries to provide customers with a more favorable suite of offerings, according to Chairman and CEO Kenneth Rees.
During an IPO road show presentation, Rees touted the business model of the Fort Worth, Texas-based online lender, which focuses on nonprime borrowers. He noted that banks have reduced credit to nonprime consumers by $142 billion since 2008, and many of those borrowers have been forced to take out payday, pawn and auto title loans.
"The options are not good," he said.
With those types of products, borrowers face a cycle of debt through higher interest rates, punitive fees and aggressive collection tactics, Rees said. Elevate Credit, he said, offers customers flexible payment options and lowers rates as they make payments. The company also aims to improve the credit profile of borrowers by reporting their payment history to credit bureaus, offering credit score monitoring and providing financial wellness tools, Rees argued.
"Elevate comes with a new breed of more responsible online products," he said.
Elevate Credit has differentiated itself from others around the industry with its stance on regulation. For instance, after the Consumer Financial Protection Bureau proposed stricter limits on payday loans, auto title loans and other products, several industry trade groups spoke out against the rules. However, Rees said the regulation would help eliminate unfair practices.
Despite efforts to portray itself as more consumer-friendly, Elevate Credit has still drawn the ire of consumer protection groups. Lauren Saunders, associate director for low-income family advocacy group National Consumer Law Center, said she has not seen any evidence that Elevate Credit helps improve borrowers' creditworthiness.
"I just think they are a long-term payday loan that can get people into a deeper and longer debt trap," Saunders said in an interview.
Saunders said Elevate Credit charges high rates that make it difficult for consumers to pay off debt; the company in its Form S-1 registration statement said its effective annual percentage rate was 146% for the year ended Dec. 31, 2016.
Rees said those types of rates are necessary because nonprime lending leads to higher charge-offs. In 2016, Elevate reported that its net charge-offs to revenues stood at 52%. Rees added that Elevate Credit's rates have been coming down and are lower than other options presented to nonprime customers.
But the company's critics simply see Elevate Credit as another lender offering high-cost loans. "We have a lot of concerns about the harm to consumers," said Center for Responsible Lending Director of State Policy Diane Standaert, whose organization works to protect individuals against predatory lending practices.
Pressure from consumer groups is unlikely to go away, and does present a risk because it could lead to greater regulation. But those risks are probably priced into the company's valuation already, said Josef Schuster, founder of IPOX Schuster LLC, which offers index products that track IPOs and spinoffs. Schuster said he expects Elevate Credit's shares to start trading as soon as April 6.
Elevate Credit did delay its IPO in 2016 because of market volatility, but investors' appetite for risk has increased this year, Schuster said.
Schuster said he expects to see some pricing pressure because of concerns about the consumer market. That market may not be at peak health given recent sluggish auto sales, and that is part of the reason Schuster expects Elevate Credit's IPO to price around the low end of its $12 per share to $14 per share range. If the company does price around $12 per share, that would present an attractive valuation to investors, Schuster added.
Investors view Elevate Credit as a play on domestic consumers, Schuster said, and its fortunes are likely to rise and fall with the consumer.
Elevate Credit hopes to use the IPO proceeds to reduce some of its debt. During the road show, Elevate Credit CFO Christopher Lutes said the company is looking to pay off some sub debt and most or all of a $50 million credit facility. If Elevate Credit can take those steps, it would reduce annual interest expense by $17 million to $18 million and drop its interest expense-to-revenue ratio to roughly 6% to 7% from 11% in 2016, he said.
Reducing interest expense would help bring Elevate Credit closer to profitability. The company reported net losses of $22.4 million in 2016 and $19.9 million in 2015, though it has produced top-line growth each year since 2013. It reported revenue of $580 million in 2016, up from $72 million in 2013, according to the road show investor presentation.
Rees said Elevate Credit has gained traction because his company offers better options to customers than the competition.
"Responsible people who are no longer being well-served by traditional providers like banks are being forced into very unsavory financial options," Rees said. "They are looking for better products, and with the Elevate products, we're able to satisfy a very important need facing so many consumers."