Millennial Accounting Standards

Millennial Accounting Standards
MAS – Apply today. Create a good feeling tomorrow.

Let us begin by taking a look at the most important rows from the balance sheet.

	Column 1	Column 2	Column 3
0		2018 $’000	2017 $’000
1
2	Cash and cash equivalents	25457	29602
3	Other financial asset	23741	8893
4	Interest bearing borrowings	161555	46748

Other financial asset is described in the report as:
Other financial asset is cash held in the Group’s Warehouse Trust with National Australia Bank (NAB) for the purposes of repayment of the Group’s secured interest bearing borrowings (as disclosed in Note 11) and payment of interest and bank fees associated to that borrowings

The massive increase in debt is to be expected as the whole point of this venture is ever increasing debt. Massive debt and diminishing ready cash. The party may settle down rather quickly once investors get a closer look at the underlying business model instead of just focussing on customer numbers. Once the apparently unmet credit requirements of this demographic, are in fact inevitably met then the capital recycle rate will naturally converge to 7.25 at the same time as merchant fees are placed under downward pressure. We had on this forum a poster suggesting that Kmart would only be paying 1% !! This seems unlikely to me but in the mad scramble for growth the merchant fee % is only going down. If we generously estimate that it converges to 3% then we end up with only 21.75% annual returns that have to cover all the credit losses as well as the costs of administering the scheme. Not all that compelling!

Lets take a look at the borrowings in more detail as disclosed in Note 11 of the latest annual report.

$111,593,000 from NAB
The secured interest bearing borrowings have been drawn down under a $350m two-year facility with NAB. The loan is repayable on the maturity date which is 30 November 2019. The facility has been secured against Afterpay Australia’s receivables with a carrying value of $221.9m as at 30 June 2018. As at 30 June 2018, the facility carries a weighted average of interest of 3.8% per annum (2017: 4.6%) and an unused balance of $238.4m.
and
$49,491,000 from the issue of the notes that were scheduled to settle on 27th April 2018.
The senior unsecured notes were issued to institutional and professional investors for a fixed rate of 7.25% over four-year maturity with interest payable every six-month period.
$100000 from the convertible note issued to Matrix
This is another interesting issue that is not very relevant to the current post. It will feature in a post in the future.


The weighted interest rate on the total debt at balance date was 4.86%


There have been some very interesting developments with the debt position post balance date. NAB has reduced its possible exposure from $350m to $300m. Explained by the company with the following:
The receivables financing facility limit provided by NAB was reduced from $350m to $300m on 15 August 2018 to reflect the cash proceeds from the $50m senior unsecured notes issued by the Group in April 2018


Why would you replace the 3.8% debt with 7.25% debt? I wonder...


And..
On 22 August 2018, the Group incorporated Citi as an additional lender into the existing NAB Australian warehouse receivables facility, providing an additional $200m of funding capacity. This increased the total facility limit to fund Australian originated receivables to $500m

$500m is a pretty big risk for the banks. What happens if there is a sudden downturn and a vast horde of suddenly unemployed consumers wish to make full use of their NeverPay accounts? Imagine the losses Have the banks put their shareholders on the hook?

I think this from the International Expansion Presentation released on 23 Aug 2018 provides the answer:
Afterpay’s NAB Facility Afterpay has financing arrangements with National Australia Bank (NAB Facility) to support Afterpay’s funding of purchases by end customers. In the unlikely event of repayments not being made or certain terms and conditions not being satisfied under the NAB Facility, National Australia Bank may terminate its obligation. In these circumstances, Afterpay’s capacity to pay merchant clients in advance of collecting purchase price instalments from end customers may be diminished in the event that other banks are not able to step in and provide financing on equivalent terms. This may have the effect of slowing down Afterpay’s growth.


A balance sheet provides some indication as to the resilience of a venture in the event of a downturn in business conditions. I score this 0/10.


Now that the company has raised another 20m, which way do you think the share price will go?

Regards
DYOR and
GLTAS