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

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…