One Main OMF
November 01, 2016 - 10:25am EST by
2016 2017
Price: 27.95 EPS 4.22 5.67
Shares Out. (in M): 135 P/E 6.6 4.9
Market Cap (in $M): 3,785 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Financial


OneMain Financial
OneMain is the leading consumer finance company in the sub to near-prime space
$4B Subprime lending spinoff, delevered and derisked trading at 5-6x 2017e earnings
Asset quality is improving as OneMain shifts to secured lending
Regulatory vacuum as banks cannot service this segment in a capital-efficient manner
Competitors’ practices and multiple investigations by regulators have led to negative
perceptions around the entire installment & payday lending industry. However, OneMain has far
better regulatory compliance than competitors
Springleaf was sold to Fortress in August 2010, then merged with OneMain subsequent to the spinoff out of Citi in March 2015 
Fortress still holds 54.5% of the combined entity
OneMain originates personal loans that are fully amortizing, fixed rate, non-revolving, secured by titled personal property, consumer goods, or other personal belongings
OneMain currently holds a $13bn portfolio of direct, unsecured and hard secured
There is a $780m legacy real estate portfolio in runoff mode
Finally, OneMain cross-sells credit, life insurance, disability insurance, involuntary unemployment insurance and property and casualty insurance together with its loans
Investment Thesis:
 OneMain has a distinct competitive advantage in the near prime space against both banks and other payday / title lenders
o Loans have an average yield of 26%, lower than competitors Regional Management (RM) and World Acceptance Corp (WRLD) but clearly above bank lending rates
o Generally payday / title lenders will lend small amounts at 50%+ rates, to FICO borrowers <500 for short terms whereas banks will lend larger amounts of money to borrowers with >660 FICO at 10%-20% rates for longer terms.
o OneMain falls in the middle of these two segments lending at rates between 12%-36%, at FICO scores <700 for $10,000-$50,000 and up to 5 years
o Due to Basel III, banks cannot compete in this space. Under the A-IRB approach, a subprime loan with a 8% probability of default receives a risk-weight of 161%, or roughly $20 in equity for each $100 in subprime loans given current regulatory capital requirements north of 12%
o At the same time, new rules on usury lending by the CFPB are forcing other payday/title lenders to lower their rates and improve lending practices
 The federal Consumer Financial Protection Bureau (CFPB) unveiled proposed rules in June that take aim at short-term payday loans charging triple-digit annual percentage rates
 These rules would also cover installment loans with larger prepayment periods that charge rates higher than 36%
 With a hard cap on interest rates at 36% and an average yield of receivables of 25%, this puts OneMain in a favorable position from a regulatory standpoint
against competitors WRLD (60% yield on receivables) and RM (47% yield on receivables)
 In addition to this, OneMain hires former regulators from the CFPB to ensure best-in class regulatory compliance
 Over the past 9 months, OneMain has significantly de-risked and de-levered its balance sheet
o Leverage has rapidly come down from >12x in 2014 to around 6x today due to securitization issuance. This de-levering of the balance sheet seems to have gone largely
unrecognized by the market
 OneMain is now an established issuer in the securitization market, issuing at rates that are competitive with its peers
o Cost synergies of $275 should be readily achievable through branch closures post-merger
o OneMain’s focus has drifted towards secured lending, which now makes up more than 1/3rd of new originations, the ultimate target is about 50% secured, 50% unsecured lending
 The difference this makes can be seen in OneMain and Springleaf’s respective performance during the financial crisis
 Whereas OneMain (80% unsecured) had peak NCOs over 12%, Springleaf (50% secured) NCOs only reached around 8%
o As a result of the merger and shift towards secured lending, lower peak NCOs should also be expected at OneMain
 Springleaf paid 9x 2017 expected post-synergy earnings for the acquisition. Today, investors can get the combined entity for 5-6x 2017 earnings
 Even in a recessionary scenario with peak NCOs of 9%, OneMain would make ~$2.8 in EPS. At around $30, we have the ability to buy the company at ~11x trough EPS
 The rough numbers are as follows:
o OneMain has $13bn of loans on its balance sheet, growing at about 10-15% p.a. as OneMain is filling a genuine need for near-prime financing as banks leave the space
o These loans yield 26% and are financed between at a 6% interest cost, leaving a NIM of ~20% or $2.6bn
o Insurance income is relatively stable around $140m
o Operating costs are also fixed around $1.35bn, but will come down by up to $275m due to branch closures
o With provisions at 7%, 10% growth, and giving OneMain some credit for implementing cost reductions, 2017 EPS would be $5.8. In a more recessionary environment with 9% provisions and no loan growth OneMain would still be able to make $2.8 in 2017 EPS
 The most important assumption is loan losses. The most likely outcome for 2017 is in our opinion somewhere in the middle: no hard recession 2017, but slowly rising provisions. With some lending growth and a moderate increase in loan loss provisions OneMain should do quite well
 Progress towards this thesis can be monitored by closely checking 60+ day delinquencies and total delinquent finance receivables in the 10-Q, as well as losses on OneMain’s outstanding securitizations. These have actually been falling as of 2Q16.
 Loan loss provisions greater than 9%
 A renewed shutdown of the securitization and/or debt markets: OneMain is heavily reliant on
both for financing
 Inconsistent/worsening underwriting standards post-merger
 Technical overhang due to Fortress selling shares
 Unforeseen regulatory action


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



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