Specialty Capital

All eyes are on the US presidential election next week and we are excited for this to be something that will be behind us. We believe that there are many small businesses that remain on the sidelines as it relates to accessing working capital financing. They want to see what happens  ENVA's 3rd Quarter Results Record originations in the SMB vertical of $1.044bn (33.5% increase YoY and 13.8% increase QoQ). 30 day delinquencies came down to 7.8% and SMB charge offs came down to 4.6% as a percentage of averaged combined loan and finance receivables.  In our opinion, As Ondeck and Headway continue to take market share and legacy B paper players continue to strive to be A paper players, competition is as high as ever. Legacy A paper players have seen funding volume come down from their targets/goals. We are seeing A paper guys pushing out term more aggressively in the last 6 to 8 weeks and our view is that going into year end, this aggressive pricing strategy will remain in place. NRDS's 3rd Quarter Results Nerdwallet saw double digit YoY growth in the SMB vertical driven primarily by renewals and SMB products. They have seen deterioration in QoQ in search visibility and monthly unique visitors were down 7% YoY. The company is working on integrating Next Door Lending (mortgage brokers) and will continue to work on being vertically integrated across all their verticals. Our view is that the lead flow from the Fundera division will continue to see competition from Lendingtree, Businessloans and other players as this space continues to remain highly competitive with CPC costs at very high levels. This week we saw three main data prints that we wanted to discuss. Consumer confidence ripped to 108.7 in October and it's at the highest level since January. While we are still below a pre pandemic high of 132.6 it's good to see that consumers are feeling animal spirits.  PCE index, the Federal reserve bellwether for a measure of inflation rose modestly in September to 2.3% yoy. Core inflation remains at 2.7% and if that remains stagnant the FED may not be able to further reduce borrowing costs down the road. There is a FED meeting next week and our view is that the FED will cut rates another 25 bps.  NFP came out this morning with only 12k jobs added vs 125k expected. Market commentary is saying this is mostly due to the hurricane and Boeing strike, however ever looking at the revised data September revised lower 31k and August revised lower 81k confirms that the labor market is weakening. A lot of the job growth over the last year was due to government hiring and spending. Our view is that the labor market isn't as strong and will continue to weaken and if Trump is elected the DOGE department will be putting a lot more pressure on the labor market as the government sector will get smaller. Happy Funding!

As expected the Fed cut rates 50 bps Wednesday While rate hikes have a lagging period before the economy sees its effects, rate cuts alleviate some of the strains a bit faster. In this case, the rate cut was very much priced in so markets wont have any significant moves in either direction. Historically, a rate cut of 50 bp (first cut after rate hikes) generally drove markets substantially lower. In this context however, we still see a soft landing environment and while there are areas of the economy where we see tightness, our view is that the small business will not really see much effects of this in the short term. On the other hand, funders will start seeing their borrowing costs go down as most funders have a cost of funding based off of the SOFR rate. As this was priced in, we wont see much in the short term. Further, we don't think pricing will change as defaults and competition continue to stay at all time highs. Private credit is pushing out more money in the revenue based financing space. We will continue seeing legacy funders vying for deals and pushing out term (but adjusting buy rates higher as they go out further) In Comp Update We are now seeing a lot more deals from brokers who use Lending Tree, Business Loans and Nerdwallet. Additionally, more customers are accustomed to speaking to more than one broker. In order to ensure a seamless process for our partners, we are now releasing an in comp update. For any in comp deals, brokers can have a differentiated offer if either of the following conditions are met Payback months are presented after offer is sent Financials (tax return, accounts receivable, accounts payable0 are presented after the offer is sent MTD Any new information will help us underwrite the file more thoroughly and as we are a common sense underwriter we value this information. Lastly, to reiterate please always ask for use of funds. That is very valuable information. Working Capital is not a sufficient answer. Happy Funding!

Specialty Capital News & Views Last week the NFP numbers were released. The BLS reported that the US economy added 142k jobs in August but adjusted payrolls over the prior two months were revised downward by 89k. The unemployment rate was revised downward to 4.2%. With this more muted report and more talk of a "soft landing," we are of the view that the FED will cut 50 bps this coming meeting. We like to look at industry breakdowns at Specialty Capital as it gives us a pulse on the macro level and gives us talking points when we do our merchant interviews with our customers. Once again we see payroll gains in construction (our wheelhouse) and healthcare (we find it difficult to compete vs the behemoths going out 18/24 months on these) .  We saw a small decline in the manufacturing sector both in payrolls and also in the ISM manufacturing index that was released last month with a print of 47.2 (reading less than 50 shows contraction) and this was the 5th consecutive month of a decline. August was a difficult month with the quality of the paper being subpar. We've seen lots of deals die in final stages due to month to date fundings. We are open minded when revenue is not pacing well as that is the reason the customer is seeking working capital. However, that is very dependent on how the merchant interview goes. Our motto is to give good human beings a chance to fix their issues. If they are passionate and can articulate why the problem exists and how they aim to fix it, we want to partner with them even with no month to date revenue (and we've done many deals like this) Submission intake was high in August but that didnt convert to fundings. We heard from our ISO partners that most paced 12 to 20% lower than July which was a big industry month overall.  The market continues to be saturated and competition is bringing margins lower for both the ISO and the Funder. We've seen some legacy players pushing out a lot of money in August, mostly on deals we found to be nonsensical. The new "Fad" is going 12m in 2nd position. Not our cup of tea. We've seen a slow down in new funders as defaults are increasing. We've also seen a lot more collection agencies come to market. Anyone can push money out, but are you in fact helping the customer if they are overleveraged or get a bad broker in their ear and take many deals? We are passionate in that we want to ensure our capital will help our customers succeed. If we can't come to that conclusion after an underwriting of cash flow and merchant interview, we will pass on the deal. September is pacing very well so far from both intake and funding volumes. We welcome a handful of new ISO partners to our platform and as always.... Happy Funding! Sources: Bloomberg, JPM, Marketwatch

Markets have rolled over in the last 24 hours with a global sell off panic starting in Japan last night. The Nikkei dropped 12% - the biggest point drop in history (worst than Black Monday in 1987), pushing the Japanese index into bear market territory. This was likely the result of the unwinding of the carry trade after the BOJ pushed rates higher by 25 bps after doing nothing for so long.  Coupled with potential tensions rising between Israel and Iran, the mega Tech sell off, Buffett's large cash position (selling off half his Apple position), we are coming into a perfect storm. Can things get worse and how should we think about this from a pricing perspective? In our view, we see this as a culmination of a few things that we would like to bring to our reader's attention, mostly focusing on the US market as it relates to our portfolio - Friday's weaker than expected Non Farm Payroll's number (multi-year high of 4.3%) amid a larger than expected slow down in hiring. This was just after reaching a multi decade low of 3.4% in April of last year. While this number is shifting higher faster than expected, the good news is that SICs in construction, leisure and hospitality added jobs last month, which is our wheelhouse. - A more modest FED meeting last week - market participants complained that the FED was moving too slow to raise rates, and now are moving too slow on cutting rates. Futures are pricing in 100bps in rate cuts into year end.  - Kamala's rise in the polling numbers from 13% in the beginning of July to 45% by the end of the month has also shook the markets with market participants not too hot with another Democratic ticket. - US pending home sales dropped by 5.7% in July (the largest decline in 9 months). With mortgage rates finally settling lower, we think the housing market may start cooling off. But will lower rates coupled with low inventory, keep prices steady? We have seen some luxury markets (Northeast, South East) come to a stand still which is affecting some of our new home builder clients. We think the carry trade unwinding still has room to go so markets can drift lower as this still isn't the "pending credit event" everyone is waiting to happen. The Middle East conflict is percolating and can blow up any moment, pushing Crude Oil higher which will affect lots of SICs again, and election jitters will continue into year end. We heard that July was a great month relative to the last three industry-wide with higher quality of paper and more customers finally pulling the trigger and moving forward with financing. We saw that on our end as well. From a pricing perspective, we remain to be disciplined on our buy / sell rates especially going out on term with low buy rate transactions. We are ok with losing deals to those with bigger pockets or new comers that need to build up market share. As always, Happy Funding!

Specialty Capital News & Views In this week's write up we wanted to touch on two main topics as we close out the month end. Inflation data in July and Enova's 2nd Quarter results. The Fed's preferred gauge for inflation PCE came up 0.1% in June and YoY PCE increased to 2.5%. Friday's report also showed consumer spending slowing down a bit alongside easy pricing pressures and a cooling labor market. Earlier this month, we had CPI come in lower by 0.1% in June and the annual rate came down to 3%, which is the lowest annual rate since early 2021.  The Fed is meeting July 30-31 and our view is that there will be no rate cut this week. However, we are seeing the futures market pricing in a 100% probability of a cut in September, with some expecting at least 2 cuts by year end. It is an election year and we've seen a wild July so a lot could change by then. Enova had another bombastic quarter with a whopping $918mm in SMB originations (29% increase YoY).   -Charge offs SMB came up to 4.8% up from 4.7% last quarter (in line up a tad from last year). 30 day  -SMB delinquencies down from last quarter and last year to 7.5% Some key takes from the Q&A on the earnings call - ENVA doesn't see competition as a threat with no new entrants entering the space "We haven't seen any of our competitors get particularly more aggressive" - They are seeing more higher quality customers coming in on the SMB side  - Online marketing / TV is helping and pushing in more business Our thoughts  ENVA has the largest share of SMB financing in the Revenue Based Finance space and has slowly cut brokers yet continues to grow its market share. Even with a Cost of Capital that has gone up by over 120 bps YoY, they are pushing out more money with origination volume up over 15% and their portfolio is performing with low charge off and delinquency rates. Portfolio thoughts We continue to see wild offerings from our competitors in the 2nd and 3rd position space and Tier 1 players continue to buy deep to pick up market share due to the competitiveness of the market Happy Funding!