Why OnDeck is being sold on the cheap

It would be too simplistic to say that the pandemic doomed OnDeck Capital, an online lender that announced an agreement Tuesday to sell itself for less than 10% of what its market value was in 2015.

Certainly the virus-induced recession was the near-term catalyst for the New York company’s deal to be sold to Enova International, another publicly traded online lender with a more diversified business model. OnDeck specializes in loans to businesses small enough and risky enough that banks generally are not interested in lending to them.

Those mom-and-pop-owned firms have been hammered by the ongoing recent downturn. At the end of June, 39.5% of OnDeck’s loans were at least 15 days past due, up from just 10.3% three months earlier. In May, the company temporarily stopped originating new loans.

But OnDeck’s troubles went deeper. The 14-year-old company struggled to meet the expectations that accompanied its 2014 initial public offering, recording $94.5 million in losses in its first two years as a public company. Cost-cutting eventually brought modest profitability, but investors were seeking margins more in line with those generated in the tech sector.

In 2018, OnDeck launched a new subsidiary that provided online lending capabilities to banks — a move that, if it panned out, could have justified a loftier stock price. OnDeck had gotten early momentum in this business through a partnership with JPMorgan Chase.

But further progress on bank partnerships was slow. A deal with PNC Financial Services in late 2018 was offset by JPMorgan’s decision to cut ties with OnDeck last year.

Before the sale announcement Tuesday, OnDeck was pursuing a bank charter, which would have lowered its funding costs and made it less susceptible to the periodic market disruptions that can make it difficult to operate a nonbank across economic cycles.

Enova Chief Executive David Fisher said during a conference call Tuesday that if the sale closes, the combined company will continue to explore the possibility of a bank charter. The two firms said that they expect the deal to close this year.

The price of the deal is $90 million, $8 million of which is to be paid in cash, with the remainder to be paid in Enova stock.

Fisher called OnDeck “highly complementary” to Enova, saying that both companies operate entirely online and have pioneered the use of analytics and data to make real-time loan decisions.

Enova plans to add the OnDeck brand, products and services to its existing array of consumer and small-business lending units. In the small-business realm, Enova operates as The Business Backer and Headway Capital, though neither of those brands is currently accepting new loan applications amid the COVID-19 outbreak.

Fisher acknowledged that there is a degree of overlap between its existing small-business loans and those offered by OnDeck. “But we did tend to tap into slightly different markets from time to time,” he said.

OnDeck CEO Noah Breslow will join Chicago-based Enova as vice chairman. As OnDeck’s creditors circled in recent months, he had been facing pressure to find an exit.

“Our mission at OnDeck has been to make lending easier for our small-business clients, and this opportunity delivers that promise on a larger scale,” Breslow said during the conference call Tuesday.

“Our analytics capabilities and advanced fraud detection will build upon Enova’s existing platform, and our investments to date in our next-generation technology infrastructure are a complement to Enova’s as well.”

In the consumer lending sphere, Enova offers payday loans under the CashNetUSA brand and personal loans as NetCredit. Consumer loans currently make up 84% of the company’s portfolio, which would fall to 39% once the OnDeck acquisition closes, according to Enova.

Fisher said that Enova believes that the competition in small-business lending is not as intense as it is in consumer lending. “And certainly from a regulatory standpoint, we think there’s significantly less regulatory risk and regulatory overhang than the consumer side,” he added.

Enova reported net income Tuesday of $48 million in the second quarter, up from $25 million in last year’s second quarter. The company indicated that government stimulus payments helped some borrowers keep up with loan payments but also said that it did not see any deterioration in loan performance in recent weeks even as some stimulus programs wound down.

OnDeck swung to a $2.1 million profit in the second quarter after a surge in its allowance for credit losses drove a $59 million net loss in the quarter that ended March 31.