Chesswood Reports C$19.8MM Q1/20 Net Income Loss, Provides COVID-19 Update
MAY 14, 2020 - 6:55 am
Chesswood Group reported C$19.8 million ($14.06 million) in Q1/20 and provided a COVID-19 update. Adjusted operating income of C$5.78 million ($4.1 million) was down 21.3% from C$7.34 million ($5.21 million).
“In contrast to our positive free cash flow for the quarter, and due to the onset of COVID-19, we recorded a large increase in our non-cash allowance for credit losses of more than $15 million as well as a non-cash goodwill impairment on our investment in Blue Chip of $12 million,” said Barry Shafran, Chesswood’s president and CEO. “These two charges overshadowed a first quarter that generated adjusted operating income of $5.8 million before the increased provision for our allowance.”
“While $5.8 million was $1.6 million less than in the first quarter of last year, our net charge-offs this year were $3.3 million higher than in the first quarter of last year, due in part to our portfolio being more than $100 million larger than last year, along with the more elevated general levels of charge-offs we have spoken to over the last eighteen months. We did begin to see the improving expense metrics we anticipated, as Tandem moved closer to profitability in the quarter, before the onset of COVID-19, which changed all of our operations significantly,” added Shafran.
Chesswood continued to support its borrowers through payment accommodations and/or deferrals through April. On a positive note, the frequency of requests and grants declined significantly toward the end of April.
Through May 1, Pawnee has provided deferrals to 24% of its customer base, with almost 90% of those customers receiving two-month deferrals. BlueChip has provided deferrals to 14% of its customer base and, while it has offered up to three-months of deferral, more than 95% of its customers that took a deferral, are making regular, reduced payments.
As businesses begin to re-open in late May and customers’ initial deferral periods begin to reach their end, Chesswood will be working with these customers to get them back on to their payment schedules as quickly as possible. Discussions with customers take place on a one-on-one basis. Chesswood’s long history in collections has shown that this approach maximizes outcomes for all. The company does expect to incur higher than normal chargeoffs in the coming months, as businesses re-open, due to the effects of the COVID-19 shutdown.
More than three-quarters of customers did not seek payment accommodations/deferrals.
Pawnee and Tandem temporarily halted new originations late in April while the company is in the process of working with the revolving credit facility syndicate for amendments which will better address COVID-19 related experience and expectations. Once completed, Chesswood expects to resume funding new transactions once again in the U.S. (at the more modest levels contemplated in Chesswood’s annual MD&A). In Canada, Blue Chip continues to fund new business under its stricter COVID-19 credit guidelines.
Chesswood has already concluded COVID-19-related formal amendments arrangements with some of its lenders and expects to finalize amendments with the remaining lenders in the next few weeks, if not earlier.
Chesswood’s recently announced decreases in staffing and reductions of management salaries by 20% was supplemented recently by a small number of additional layoffs and furloughs, unfortunately. Its personnel expenses have therefore been reduced by approximately 30% in addition to the suspension of directors’ fees.
There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic and how quickly and on what scale U.S. and Canadian businesses will be reopened. Chesswood’s management and directors look forward to the rehiring of as many laid-off staff as possible and a return to funding new business in the U.S. as soon as possible.
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