Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices, credit performance of loans and interest rates . Certain unobservable inputs may (in isolation) have either a directionally consistent or opposite impact on the fair value of the financial instrument for a given change in that input. When multiple inputs are used within the valuation techniques for loans, a change in one input in a certain direction may be offset by an opposite change from another input. We recorded a fair value mark-to-market adjustment related to our Loans Receivable at Fair Value and asset-backed notes of $119.7 million for the year ended December 31, 2022, an increase of approximately $50.4 million compared to the prior year.
Credit Performance Sensitivity
In a strong economic climate, credit losses may decrease due to low unemployment and rising wages, which will increase the fair value of our Loans Receivable at Fair Value, which increases Net Revenue. In a weak economic climate, credit losses may increase due to high unemployment and falling wages, which will decrease the fair value of our Loans Receivable at Fair Value, which decreases Net Revenue.
The following table presents estimates at December 31, 2022. Actual results could differ materially from these estimates:
Remaining Cumulative Charge-Offs Projected percentage change in the fair value of our Loans Receivable at Fair Value
Projected change in net fair value recorded in earnings
($ in thousands)
120% of expected (2.0) % $ (60,706)
110% of expected (1.0) % $ (30,646)
100% of expected — % $ —
90% of expected 1.0 % $ 31,236
80% of expected 2.0 % $ 63,089
Market Rate and Interest Rate Sensitivity
The fair values of our Loans Receivable at Fair Value are estimated using a discounted cash flow methodology, where the discount rate considers various inputs such as the price that we can sell loans to a third party in a non-public market, market conditions such as interest rates, and credit spreads. The discount rates may change due to expected loan performance. We charge fixed rates on our loans and the average life of our loan portfolio is approximately 1.0 years. The fair value of fixed rate loans will generally change when interest rates change, because interest rates will impact the discount rate the market uses to value our loans. As of December 31, 2022, we had $2.39 billion of fixed-rate asset-backed notes outstanding with an average life of 1.4 years. Our borrowing cost does not vary with interest rates for our asset-backed notes, but the fair value will generally change when interest rates change, because interest rates will impact the discount rate the market uses to value our notes.
As of December 31, 2022, we had $243.0 million of outstanding borrowings under our Personal Loan Warehouse facility. The interest rate of the PLW is 1-month LIBOR plus a spread of 2.17% and the maximum borrowing amount is $600.0 million. As of December 31, 2022, we had $77.0 million of outstanding borrowings under our Credit Card Warehouse facility. The interest rate on the Secured Financing - CCW facility is LIBOR, with a floor of 1.00% , plus 6.00% on the first $18.8 million of principal outstanding and LIBOR, with a floor of 0.00% , plus 3.41% on the remaining outstanding principal balance and the maximum borrowing amount is $150.0 million. On March 8, 2023, the Credit Card Warehouse facility was amended, reducing the maximum borrowing amount from $150.0 million to $120.0 million.
As of December 31, 2022, we had $85.7 million outstanding under our Acquisition Financing. The interest rate of the Acquisition Financing is SOFR plus a spread of 8.00%. As of December 31, 2022, we had $150.0 million outstanding under our Corporate Financing. The interest rate of the Corporate Financing is SOFR plus a spread of 9.00%. On March 10, 2023 we upsized and amended our Corporate Financing facility to be able to borrow up to an additional $75.0 million. We borrowed $20.8 million of Incremental Tranche A-1 Loans and intend to borrow an additional $4.2 million of Incremental Tranche A-2 Loans on or about March 27, 2023, which amount has been committed by the applicable lenders. We may borrow up to an aggregate additional amount of $50.0 million on an uncommitted basis, in two $25.0 million tranches, expected to be available, if provided by the applicable lenders, on or about April 21, 2023 and June 23, 2023, respectively. The term loan now bears interest at an amount payable in cash equal to 1-month term SOFR plus 9.00%, plus an amount payable in cash or in kind, at the Company’s option, equal to 3.00%.
Changes in interest rates in the future will likely affect our borrowing costs of our Secured Financing facilities, Acquisition Financing and Corporate Financing. While not carried at fair value on the Consolidated Balance Sheets, we do not expect changes in interest rates to impact the fair value of our Secured Financing facilities, Acquisition Financing or Corporate Financing facility.
In a strong economic climate, interest rates may rise, which will decrease the fair value of our Loans Receivable at Fair Value, which reduces Net Revenue. Rising interest rates will also decrease the fair value of our asset-backed notes, which increases Net Revenue. Conversely, in a weak economic climate, interest rates may fall, which will increase the fair value of our Loans Receivable at Fair Value, which increases Net Revenue. Decreasing interest rates will also increase the fair value of our asset-backed notes, which reduces Net Revenue. Because the duration and fair value of our loans and asset-backed notes are different, the respective changes in fair value will not fully offset each other.
The following table presents estimates at December 31, 2022. Actual results could differ materially from these estimates:
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Change in Interest Rates Projected percentage change in the fair value of our Loans Receivable at Fair Value
Projected percentage change in the fair value of our asset-backed notes Projected change in net fair value recorded in earnings
($ in thousands)
-100 Basis Points 0.8 % 0.8 % $ 4,354
-50 Basis Points 0.4 % 0.4 % $ 2,149
-25 Basis Points 0.2 % 0.2 % $ 1,065
Basis Interest Rate — % — % $ —
+25 Basis Points (0.2) % (0.2) % $ (1,067)
+50 Basis Points (0.4) % (0.4) % $ (2,115)
+100 Basis Points (0.8) % (0.8) % $ (4,177)
Prepayment Sensitivity
In a strong economic climate, borrowers’ incomes may increase which may lead them to prepay their loans more quickly. In a weak economic climate, borrowers' incomes may decrease which may lead them to prepay their loans more slowly. The availability of government stimulus payments to consumers during a weak economy may cause prepayments to increase. Additionally, changes in the eligibility requirements for our Good Customer Program, which allows borrowers with existing loans to take out a new loan and use a portion of the proceeds to pay-off their existing loan, could impact prepayment rates. In the future, we may introduce new products or features that could impact the prepayment behavior of our existing loans. Increased competition may also lead to increased prepayment, if our borrowers take out a loan from another lender to refinance our loan.
The following table presents estimates at December 31, 2022. Actual results could differ materially from these estimates:
Remaining Cumulative Prepayments Projected percentage change in the fair value of our Loans Receivable at Fair Value
Projected change in net fair value recorded in earnings
($ in thousands)
120% of expected (0.1) % $ (3,073)
110% of expected (0.1) % $ (1,559)
100% of expected — % $ —
90% of expected 0.1 % $ 1,594
80% of expected 0.1 % $ 3,233
Foreign Currency Exchange Risk
All of our revenue and substantially all of our operating expenses are denominated in U.S. dollars. Our non-U.S. dollar operating expenses in Mexico and India made up 4.1% of total operating expenses in 2022. All of our interest income is denominated in U.S. dollars and is therefore not subject to foreign currency exchange risk.
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