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December 09, 2016  

Small-Business Lender Unwinds Securities

A management shakeup at CAN Capital reflects trouble the small-business lender is having with its only securitization to date.

CAN said on Nov. 29 that chief executive Dan DeMeo and two members of his team had taken an indefinite leave of absence after an internal review revealed some assets weren’t performing as expected. Sources said the problems came to light after over-collateralization levels fell below allowable limits for a $191 million bond issue the New York company completed in October 2014.

That event forced the deal to begin unwinding ahead of schedule, starting with a principal balloon payment of $46 million to senior bondholders in November. It also led S&P and DBRS to place the bonds on watch for possible downgrades on Dec. 2.

Under the transaction’s original structure, principal distributions weren’t supposed to commence until May 2017 — with bondholders receiving only interest payments until that point.

Following the balloon payment, the 2.9-year senior securities, rated single-A, have a remaining principal balance of $124.8 million. Investors holding $20 million of 3.4-year subordinate notes rated triple-B and triple-B-minus won’t be paid until senior bondholders get all of their principal back.

CAN said, “We self-identified that some assets were not performing as expected and that there was a need for process improvements in collections.”

The securitization employs a revolving trust, encompassing both merchant cash advances and term loans. CAN was among the first small-business lenders to offer merchant cash advances, which require borrowers to pay down portions of their loan balances each day based on their sales volumes. Since 2010, the company also has been offering term loans that require daily payments regardless of sales levels. CAN originates most of its business online.

The problem, sources said, is that technology the company designed to track merchant cash advances sometimes fails to properly account for term loans. As a result, loans that had fallen delinquent were still marked as performing until CAN discovered the discrepancy late last month.

Once the delinquent loans were identified as such, the credit cushion protecting senior bondholders plummeted from $10.3 million to $480,000, according to rating-agency reports.

It’s unclear whether the deterioration ultimately will lead to losses for investors — or exactly when CAN is required to make its next principal payment to senior bondholders.

“You don’t expect a $9 million writedown in one month,” one source said. “This is what triggers are for. Not to disparage the business, but these are not the best credits. They are loans to hair salons and the like with cashflows that go up and down.”