Specialty Capital

As we gather to celebrate Independence Day, I’m reminded of the enduring spirit and determination that our founding fathers exhibited in securing our nation’s freedom. As an immigrant CEO, this country has provided and continues to provide incredible opportunities to anyone that wants to will change into fruition. That is the willpower and vision laid by our forefathers. They laid the foundation for the prosperous and dynamic country we call home. Today, I want to take a moment to express my heartfelt gratitude to each of you. To our relationship partners who consistently send us leads, thank you for your trust and collaboration. Your support is instrumental in helping us connect with businesses that can benefit from our approach in underwriting. We have a human touch. We deeply value your partnership and look forward to continuing our successful journey together. To our esteemed customers, thank you for placing your confidence in us for your capital financing needs. Your trust drives us to work harder every day to provide the best possible service and support. Your success is our success, and we are committed to helping you achieve your business goals. As we celebrate this 4th of July, let’s remember that the same determination that fueled our founding fathers can inspire us to create a better tomorrow. Together, with the strength of our partnerships and the confidence of our customers, we can continue to achieve great things. Wishing you all a safe and joyous Independence Day. Happy Funding!

Specialty Capital News & Views This week, we experienced a flurry of economic news that we want to share with our readers. As our portfolio is primarily geared towards small businesses in the construction SIC, we always consider how housing data might impact some of our customers. New home sales took a significant hit last month, reaching their lowest level since May. Sales of new builds fell to an annual rate of 619,000, down 11.3%. The steepest drop occurred in the Northeast, where sales plummeted by 44%. The supply of new home inventory is increasing, but sellers have been firm about not reducing their prices. Home prices hit an all-time high last month despite low spending. With rates remaining stubbornly high, people are staying put and not moving. Our view is that as soon as rates drop a little, there will be an influx of inventory hitting the market, potentially shifting it to a buyer's market—but that remains to be seen. We continue to be aggressive in our offerings for plumbing, HVAC, drywall, and insulation companies. Recently, we’ve become slightly bullish on our offerings in the Trucking SIC, as we have seen tender rejections increase coming out of the West Coast. While we remain selective due to the higher risk of defaults, we continue to provide offerings to our relationship partners. We believe it is a valuable tool that enhances customer service. In Q2, we noticed many new funders entering the landscape. There is considerable saturation in the high-risk space, prompting more players to target the C to B- box. While some may adopt a strategy of aggressively buying paper and going deep, this isn’t our approach. We remain relationship-driven and are committed to being here for the long haul. Happy Funding!

Happy Father’s Day! To all the incredible fathers and father figures out there, we want to take a moment to celebrate you. Whether you’re running a small business, managing a team, or simply leading by example, your dedication, hard work, and love make a profound difference every day. At Specialty Capital, we understand the challenges and rewards of balancing family life with running a business. We’re here to support you with the working capital you need to thrive, so you can continue to be the backbone of your family and community. Today, we honor and thank you for everything you do. Happy Father’s Day! Happy Funding!

On this Memorial Day, we honor and remember the brave men and women who made the ultimate sacrifice for our country. Their courage and dedication ensure the freedoms we enjoy today. As we take this time to reflect and pay tribute, let’s also extend our gratitude to all who serve and have served. Thank you for your unwavering commitment. #MemorialDay #HonorTheFallen #Gratitude

Specialty Capital News & Views Today we saw the much anticipated April Inflation report with CPI easing at 3.4%. While the data print came in line with expectations and lower than last month, consumer prices continue to be elevated above the FED's 2% bogie. On a positive note, core inflation came down to 3.6% which is the lowest reading since April 2021. Stock futures are up and treasury yields have come down as rate futures markets are showing an increasing probability of a rate cut in September. We wouldn't get too excited with these numbers. Prices are still elevated, especially for food stuff and gas. What is troubling is that shelter costs remain stubbornly high. In our past write ups, we discussed how shelter (as a leading indicator) can drive down inflation but this has not happened. We also had a retail sales print showing that consumers aren't spending as inflation continues hurting their pockets. Forecasts were for a 0.4% increase but they were unchanged from March. The two previous months were also revised downwards, but YoY spending is up a tad. We continue to see files in the trucking SIC come in and more and more we hear that no one is offering on this SIC. We are pretty selective on these files but are open minded depending on time in business, cash flow and jurisdiction. Our sweet spot remains the specialty contractor SIC, we love hearing their stories. We've seen an influx of funeral homes asking for financing. We've spoken to a handful and they all say the same thing - Covid they grew operations as there were lots of deaths but a lot less people are dying now and they cannot sustain their operations.  Submission quality this month has been far better across the board with higher offer rates. We will be attending Broker Fair next week as a Sponsor, come say hi. Happy Funding!

Specialty Capital News & Views In this week's write up we wanted to focus on the inflation numbers released a few days ago as well as the recent litigation in the revenue based finance landscape. CPI was released on Wednesday and came in hotter than expected with annual inflation up 3.5% YoY (vs 3.4% expected) and Core CPI was up to 3.8% (vs 3.7% expected). This is the third monthly gain. Energy and shelter was responsible for half the rise in inflation. Services sector continues to remain strong and was up last month, consumers want to spend. Goods at grocery stores remained unchanged.  Future prices for FED rates are showing 2 cuts now instead of 3 and the likelihood of a cut in June has gone down to ~18%.    Our view on inflation is pretty much unchanged, we believe that while inflation has come down tremendously from its peak, it makes sense for it to be stubborn at these levels. Inflation is one of the most difficult indicators to forecast and we put it in "the too hard box". We also dont think month to month changes should be put under the microscope. We use it as a metric to think about how consumers are acting with their pockets and how it can affect our pricing in the short and medium term.  Overall, it seems that the services sector remains strong, so we remain aggressive in SIC. We look for long TIB and great cash flow. On the other hand, housing remains stagnant, hence higher shelter costs. With folks not moving and staying put, we've seen business in the furniture SIC struggle and we have tightened up in this sector - we believe defaults will increase.  In other news, besides the NY AG going after companies with shady practices in the revenue based finance space, the Southern District of NY and Department of Justice has opened up scope and are looking more into the line of credit frauds and the lack of abiding by the reconciliation provision. We believe that there will be more indictments in the following months. Overall, this will bode well for our industry. Happy Funding!

SPECIALTY CAPITAL NEWS & VIEWS In this week's write up we wanted to focus on a few key topics that we have discussed internally as it relates to the small business financing market.  Trucking SIC: Tender rejections dropped back to 2023 lows and no real momentum is picking up. What does it mean to have low tender rejections? When a market is tight in the freight market carriers "reject" loads and demand higher pricing, which was the case post covid into mid 2022. Today, however, carriers are accepting whatever they can get regardless of price. The market remains loose and we do not see this changing in the near term. We still provide financing to strong customers in this SIC, but these are far and few in between, especially considering the low collectability behind a factoring UCC. Minimum wage law in California - We saw a lot of chatter on this in recent days as the law went into effect. We wanted to share that this law only applies to restaurants offering limited or no table service and which are part of a national chain with at least 60 establishments nationwide. Our product is for restaurants that are much smaller in size. We believe that the restaurant SIC will be more desirable going forward in California, as the bigger chains will have to be increasing pricing and firing people (i.e more hiring capability and keeping pricing more competitive vs chains) Neel Kashkari, Minneapolis Fed Chief, floated the idea of "no rate cuts" this year. In a virtual hearing event on Thursday, he said "if we continue to see inflation moving sideways, then that would make me question whether we needed to do those rate cuts at all" The good news is that he isn't a voting member on monetary policy this year and while these comments spooked the market, we believe the FED pivot will play as this is an election year. On the submission side, we have started to see better files come in at the start of April, and customers are now more in tune with the current pricing and landscape of the Revenue Based Financing Market. We remain thoughtful in our pricing and underwriting strategy Happy Funding!

SPECIALTY CAPITAL NEWS & VIEWS In this week's write up we wanted to share our views on the housing market and the Fed Funds Rate decision. Home Sales and Cash Buyers: Home sales for February surged by 9.5%, marking the largest increase since February 2023, reaching an annualized rate of 4.38 million units. Remarkably, a significant portion of these sales (one third) were cash transactions. Housing Starts and Building Permits: Construction of new homes rebounded strongly in February, increasing by 10.7% to a pace of 1.52 million units annually, the largest gain in nine months. Building permits, which indicate future construction activity, also rose by 1.9% to the same annual rate. Single Family Residential Construction: Home builders focused on ramping up construction of single-family residences, likely in response to the persistent shortage of housing inventory. We remain aggressive in our offerings in the construction SIC due to these demand/supply factors. Commercial Financing Trends: There's been a shift in financing trends, with more customers seeking revenue-based financing. Our submission intake data can confirm this uptick. However, there's a noted decline in the quality of the paper we are seeing on our side. Defaults have slightly risen in most recent cohorts but nothing too alarming. Qualified customers are also exhibiting caution, leading to a slowdown contract out conversions. Our view is that this is more so related to seasonality, this time of the year has always been slow for us. Additionally, between it being an election year and higher rates, customers are not as eager to pull the trigger. The Federal Reserve announced on Wednesday that it would maintain its current benchmark overnight borrowing rate in the range of 5.25% to 5.5%, consistent with its stance since July 2023. However, Jpow and the team reiterated its commitment to stimulate economic growth through monetary policy adjustments, with three rate cuts poised for implementation in the upcoming months and slow down in the balance sheet rundown.  The market continues to rip to new highs across the board in the S&P500, Bitcoin, Gold among other asset classes. The goldilocks patterns continue.

Specialty Capital News & Views This week we had major economic economic data prints that can help us better understand the underlying economic parameters that may affect our customers. We would like to discuss two in this week's write up.  Durable goods dropped a staggering 6.1% in January but most of it was due to a brief pause in airplane orders, adjusting for airplanes and cars, Durable Goods came down 0.3%. We like to look at orders ex transportation as that gives us a better view of how well businesses are performing. Overall, it seems that there is strength in the consumer as business investments (equipment and core manufactured goods) show signs of recovery. Pending Home Sales falls the most in five months as mortgage rates tick back up. Pending homes sales sank 4.9% in January and transactions are down 8.8% relative to last year. This makes sense as mortgage rates ran back up to 7%, there isn't much inventory available and affordability is at multi decade highs The supply of new homes remains low so we remain aggressive in our offerings in certain jurisdictions where we see large home builders developing. Overall the consumer is a lot more rate sensitive. We believe there will be a tremendous amount of pent up demand when rates go lower later this year and housing will remain strong in 2024. February was a difficult month as is the case usually. We've seen submission count increase 15% from January daily average but overall quality of paper has come down with more declines. Most of the declines were due to decreasing revenue and poor cash flow trends. There has been an increase in double fundings as merchants have more brokers in their ear than ever. The competitive landscape remains challenging and new entrants are pushing terms to levels we have not seen in years. Even C/D paper players are going further out on term. There has also been an uptick in defaults across the credit curve so incumbent players will/have been tightening up credit standards. 

SPECIALTY CAPITAL NEWS & VIEWS We trust everyone welcomed 2024 with enthusiasm! The positive feedback on our rebrand is heartening - please continue to share your thoughts! Our commitment to refining our processes, from submission to pricing and final underwriting, remains unwavering. The primary objective is to ensure a seamless experience for both our small business customers and referral partnerships. In this update, we want to share some key insights. We'll discuss ENVA's earnings, insights from the recent Fed Rate Decision, and our reflections on the current competitive landscape. Federal Reserve Update: Yesterday, Jpow and Federal officials maintained interest rates for the fourth consecutive meeting. Our December write-up highlighted market expectations for aggressive rate cuts in 2024, leading to a year-end rally. Following recent communications, it appears the market is adjusting its expectations for future rate cuts. During Powell's press conference, the Fed emphasized their data-driven approach to policy. They acknowledge inflation risks and note a moderation in job data from summer peaks. Powell hinted that a March rate cut is unlikely, maintaining a cautious stance. As of now, we don't expect a Fed Pivot. ENVA's Remarkable Q4: In other news, ENVA reported a stellar Q4 with a record $930 million in SMB originations. The SMB vertical, including Ondeck and Headway, now constitutes 62% of their overall portfolio. Learning from charge-offs in late 2022, ENVA embraced machine learning tools to refine their approach, resulting in aggressive growth in Q4. Notably, despite cutting referral partnerships, they've expanded origination volumes, showcasing their competitive edge. Charge-offs reduced in the SMB portfolio in the fourth quarter. In our view, ENVA will continue buying up lots of market share in 2024 as they continue to be well capitalized. We also observed a surge in new entrants in the merchant advance funding space over the past three months. Incumbent funders must maintain vigilance and pricing discipline in the face of this increased competition. Differentiation is crucial, especially for new players, who must be bold in their offerings and forge uncomfortable but necessary relationships. Term and rate is the name of the game. Changing Dynamics in C/D Paper Space: Competitiveness in the C/D paper space has reached new heights. High-risk funders have extended term curves, with those maxing out at 6 months now pushing to 9 months. The competition among both funders and brokers is at its peak, making it essential for market participants to stay agile and disciplined in their pricing strategies. More importantly, relationships are key. As the market landscape continues to evolve, we are poised to navigate these challenges with the same dedication and agility that has defined Specialty Capital. Let's continue to embrace the opportunities and challenges ahead! Happy Funding!