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2/ Square has amended its corporate credit facility -- the thing they can drawn on if the DTCC says they need to pony up $1B in extra cash coll. . . oh wait, that's another Bay Area company's issue.
Anyway, Square amended its corporate credit facility.
Anyway, Square amended its corporate credit facility.
3/ The amendment allows them to pledge loans to the Federal Reserve borrowing facility for the Paycheck Protection Program. Square is now allowed to pledge up to $1B in loans to the PPPLF without violating the terms of its credit facility.
4/ Why do this -- here's some ops/industry insight.
Corporate credit facilities put the borrower on a leash. Have to keep your debt at a certain level. Can't sell certain assets. Can't pledge others. So the creditors have some control over your ability to repay/liquidate.
Corporate credit facilities put the borrower on a leash. Have to keep your debt at a certain level. Can't sell certain assets. Can't pledge others. So the creditors have some control over your ability to repay/liquidate.
5/ Most of these terms are broad in the creditor's favor. So when you want to do something that's good business and product sense, like participate in the Fed's PPPLF, your plain language of the credit facility usually blocks/limits it.
6/ The amendment is routine good housekeeping and ordinary course business. It's like cleaning your bathroom once a week. Nothing special in and of itself.
But if you know how the PPPLF functions, you can glean interesting insights on where Square is going.
Come closer . . .
But if you know how the PPPLF functions, you can glean interesting insights on where Square is going.
Come closer . . .
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8/ Back to Square and the interesting business foreshadowing.
SQ can now push up to $1B in PPP Loans to the fed without violating its credit facility. SQ is also directly approved by the Treasury and SBA to be a direct PPP lender, so they can make the loans without a bank.
SQ can now push up to $1B in PPP Loans to the fed without violating its credit facility. SQ is also directly approved by the Treasury and SBA to be a direct PPP lender, so they can make the loans without a bank.
9/ At the same time, Square partnered with Celtic Bank for last year's PPP offering. (It was all over their Ts + Cs, so no non-public info here)
Celtic as a bank can also push PPP Loans to the fed as the originator of those assets.
Celtic as a bank can also push PPP Loans to the fed as the originator of those assets.
10/ Another thing to know (I'll tie it together at the end) is the PPP fee structure.
The new fee structure breaks out as:
Up to a $2,500 fee on loans up to $50K
5% fee on loans between $50K and up to $350K
3% on $350K and one dollar, up to $2M
1% on $2M and up
The new fee structure breaks out as:
Up to a $2,500 fee on loans up to $50K
5% fee on loans between $50K and up to $350K
3% on $350K and one dollar, up to $2M
1% on $2M and up
11/ Square did more than $800M in the entirety of the first run of PPP, before second draw loans were introduced. Its average loan size was ~$11K. https://squareup.com/us/en/press/ppp-in-review
12/ So what does this mean?
Square was able to start originating new PPP Loans in January 2021. According to the January 31, 2021 PPP Report, FinTechs have originated more than $1.6B in PPP Loans for the month. Small banks have originated more than $39B
https://www.sba.gov/sites/default/files/2021-02/PPP_Report_Public_210131-508.pdf
Square was able to start originating new PPP Loans in January 2021. According to the January 31, 2021 PPP Report, FinTechs have originated more than $1.6B in PPP Loans for the month. Small banks have originated more than $39B
https://www.sba.gov/sites/default/files/2021-02/PPP_Report_Public_210131-508.pdf
13/ Square's volume will fall somewhere between those two numbers, depending on whether they're originating through Celtic AND their PPP direct lender authorization, or just the direct lender authorization (FinTech only bucket of $1.6B)
14/ Square should be able to rinse + repeat the entire $820M+ in 2020 PPP volume as second draw loans. Given their average loan size was well below $50K, their fee take will likely be $2,500 per loan. They did more than 76,000 PP loans in 2020. So that's a ballpark fee of $190M
15/ SQ doesn't have to split that fee with Celtic or other bank partners if they're originating directly. Square can flip up to $1B to the PPPLF themselves, meaning they can originate up to $1B and take a $2,500 fee per loan (or 5% if they run into loans above $50K).
16/ So if you want to estimate the impact of PPP on Square's Q1 2021 earnings, they've given you a rule of thumb. They have customers to pretty easily hit $1B in loan volume. They have the runway from Goldman. And the math leads to ~$190M in revenue coming from Square Capital.
17/ Quick caveats and addendums. They could do MORE! They can still originate first draw loans. Only things holding them back are ops bandwidth to process applications and latency issues at the SBA. Also, someone check my lawyer math and call me out if I've flubbed my numbers.
