Rapid Financial Services taps securitization to fund merchant cash advances
Rapid Financial Services, a small business lender that has been around in one form or another since 2005, is making its first trip to the securitization market.
The initial offering is just $80 million, but transaction documents allow RFS to issue up to $500 million, as long as certain conditions are met, which could dilute the control and voting rights of the existing noteholders.
RFS 2018-1 will issue three classes of notes: $67.4 million of Class A notes benefit from 20.5% credit enhancement and are provisionally rated A by Kroll Bond Rating Agency; $7.4 million of Class B notes are rated BBB and $5.2 million of Class C notes are rated BB.
This transaction is secured by a revolving portfolio of factored receivables, also known as merchant cash advances, purchased from small businesses at a discounted price. The portfolio will revolve for some 36 months after the deal closes; during this period RFS can transfer additional receivables to the pool.
RFS may also elect to redeem the notes in whole or in part on any payment date on or after the payment date in December 2020.
Guggenheim Securities is the initial purchaser.
Unlike traditional loans, factoring contracts contain no set term, maturity date or minimum periodic payment amounts. Among the primary credit considerations of this deal, according to Kroll, is the fact that currently approximately 14.06% of the portfolio consist of non-straight-line receivables, where the merchant expects to receive a varying amount of collections each period, and owes a percentage of this amount. Furthermore, this type of receivable can account for up to 50% of the portfolio.
The portfolio is subject to other concentration limits, including the percentage of receivables originated in certain states and industries, the amount of receivable various merchants and with various credit metrics.
RFS was founded in 2009, is headquartered in Bethesda, Maryland, and has 168 employees. The company uses proprietary risk models to assess applicants for qualification, loan sizing and risk-adjusted pricing and has funded over $1.5 billion to more than 24,000 businesses.
The company’s primary equity investors include Rockbridge Growth Equity and Falcon Investment Advisors.
Currently, RFS funds its receivables using a $100 million warehouse facility provided by its equity holders, the sale of participations and/or whole product sales to third parties. As of Oct. 31, 2018, there was $79.2 million drawn under the revolving warehouse facility, which expires in 2020.