Q: Good afternoon. GSY is struggling a bit lately but so is the rest of the market. I read an article that said GSY has high debt levels that are not well covered by cash flow. This got me wondering why does GSY have high debt levels and where does it get its money to lend? If they borrow to raise money to lend and rates drop could they not get into a squeeze where the margin between money they loan out and loans they have to reply narrows?
5i Research Answer:
Because of its growth, GSY tends to report weak cash flow as cash is needed to fund new loans. Its business of lending money of course also makes debt levels high. But its loans turn over very quickly, and it has very tight credit controls, considering its 'non-prime' customers. On a regular basis it securitizes (packages and sells) its loans and this ensures ongoing new funding. It still makes money on securitizations, as it charges as management fee on the sold assets and also the coupon rate on securitizations is less than what GSY earns on its portfolio. The shorter term nature of its loans also helps insure credit/debit matches well, though with quick interest rate moves it does have some timing risk on loans.