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City Loan, Inc. October 29, 2008
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Capitalizing on Negative Consumer Trends
Did you know that American consumer borrowing recently experienced its largest month-over-month percentage decrease ever? It's no secret that the era of easy credit in America has come to an abrupt end. In today's edition, we'd like to touch on one of our portfolio companies that is benefiting significantly from the end of an era and America's frozen credit market. Hey, at least somebody is.
The recent record dip in consumer borrowing and rise in U.S. unemployment has undermined a long established quid pro quo of lending. However, in its wake, it has also created a massive opportunity for providers of new and innovative loan products such as City Loan Inc. (OTCBB: CYLN). CYLN is an emerging provider of auto title loans that grant short-term credit based on the value of a one's automobile. While not so glamorous by nature, auto title loans are quickly gaining popularity in today's turbulent economic environment due to their quick and convenient nature.
U.S. consumer credit dropped by nearly $8 billion during August, the first decrease in a decade and the worst fall since related statistics first began being compiled in 1943. Moreover, roughly 460,000 Americans are now losing their jobs each week, leaving more than 6% of the U.S. workforce out of work today. To make matters even worse, the credit market is frozen rock solid.
A recent Federal Reserve bank survey shows that 83% of major credit card issuers tightened their lending standards during the 3rd quarter of 2008, a whopping increase from 45% during the previous quarter. For consumers, oftentimes those with a good credit score; this means reduced credit limits, increased interest rates, and even canceled cards.
Emergencies happen to everyone. However, financial remedies are becoming increasingly harder to come by for people from all walks of life. So, while auto title loans used to be issued largely to the unemployed or those with bad credit, with the credit market sealed up tighter than a drum everyone from doctors to stock brokers are now utilizing them at a record clip.
So, How Could This Possibly Benefit CYLN?
While no data currently exists with regard to the size of the auto title loan market because it has been largely unregulated to date, most assessments that I've come across peg it at roughly ¼ the size of the $40 billion payday loan market, or a robust $10 billion.
As the credit market becomes increasingly constricted, Americans are finding it harder than ever to access capital in a pinch.
These situations can include but surely aren't limited to instances in which the small business owner can't quite make payroll for the month or is confronted with some out of the blue but essential costs that weren't planned for when the annual budget was drawn up. This could also include times when a family car needs a new transmission, the child requires a spur of the moment surgery not covered by insurance, or a roof springs a leak during the first storm of the winter. In all of these cases, a 30-day title loan can be a lifesaver for many.
Highly profitable yet potentially predatory business model
CYLN undertakes a number of precautions to minimize risk in a day and age where consumers have compiled roughly $1 trillion in credit card debt which has risen nearly 75% over the past decade while real wages have increased just 4% and mortgage related debt has skyrocketed to $10 trillion.
Firstly, the company bases the principal of its loans on between 25% to 50% of the market value of the recipient's automobile. In addition, auto title lenders typically charge a monthly interest rate of 25% on the principal, which quickly turns into a 300% APL if the loan is not paid off in its entirety after the first month.
So, in theory, a $600 loan turns into a $750 loan after month #1 if not paid off in full. In the "Wild West of lending" City Loan could potentially receive far more than the principal amount over a 6-month period and still end up owning the car if the recipient is unable to make the balloon payment on the principal after six months of just paying the interest. As you can see, this is an unbelievably profitable, although potentially predatory, business model.
Furthermore, to avoid the scammers. CYLN equips the leveraged automobile with a GPS tracking device that helps them locate and repossess the vehicle with minimal effort. In order to prevent removal of the LoJack-like (http://www.lojack.com/) apparatus, City Loan utilizes a minuscule contraption that by the company's account is nearly impossible to locate. Field workers implant the device in different parts of the automobile to prevent loan recipients from conspiring together to locate and remove the GPS system.
Essentially, by issuing the loan only on a small percentage of the auto's book value, constructing the loan terms to be extremely favorable to the lender, and protecting the investment with a state-of-the-art locating system, CYLN creates an extremely profitable and low risk opportunity for itself. Quite frankly, this is one of the most ingenious lending practices I've ever come across. If only the sub-prime folks could have been so wise.
Expansion via Pawn Shop Partnership
.
CYLN aspires to increase exposure of its auto title loan product and keep overhead low via collaboration with pawnshop operators owning brick & mortar locations. After announcing a relationship with Abes Pawn Shop in Santa Clarita, California last week, CYLN is back in the news today boasting a similar alliance with Inland Empire (CA) lender Pay Day Advance Stores. Given the current economic climate in the U.S., this certainly appears to be the most efficient growth strategy that the company could employ. Moreover, City Loan's new partners seem excited about what their relationships could soon yield.
Commenting on the deal announced today, a representative from Pay Day Advance's parent company, Empire Marketing Media stated "We have 5 locations throughout the Inland Empire and with the addition of our Car Title Lending partnership with City Loan, this product helps us create new revenue streams. We project that, by partnering with City Loan, we will generate another $250,000 annually in new loan business".
Net - Net
Unfortunately, in today's tumultuous economic environment, consumers are increasingly being forced to leverage key assets including automobiles and households to secure loans during times of need. Fortunately for them, lenders such as City Loan Inc. (OTCBB: CYLN) are expanding throughout the country and offering products that help meet their needs in a quick and convenient manner.
As household wealth and consumer credit options wane in the coming months due to the ongoing recession, CYLN's revenue and profit margin should triumph. Check back soon for a hot-off-the-presses corporate profile on the company as well as more newsletter and blog commentary on why we think CYLN is one to watch in 2008 and beyond.
Vol: 4 - Issue: 1
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In This Issue
Capitalizing on Negative Consumer Trends
Article Headline
So, How Could This Possibly Benefit CYLN?
Expansion via Pawn Shop Partnership
Net - Net
SPOTLIGHT COMPANY
Pinnacle Energy Corp. (OTCBB: PENC) is an independent oil and gas producer focused on acquiring and developing mature oil & gas producing assets. Pinnacle Energy Corp. is headquartered in Calgary, Alberta, Canada
Quote of the day:
"Economic depression cannot be cured by legislative action or executive pronouncement. Economic wounds must be healed by the action of the cells of the economic body - the producers and consumers themselves."
Herbert Hoover
As always, do you due diligence and happy trading!
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