Author: Waleed M. Tariq
- NEWT is a unique BDC. The corporation controls its subsidiaries.
- Newtek Small Company Finance (NSBF) is its main business, offering SBA 7(A) loans and accounts receivable finance.
- NSBF has funded over $1 billion in SBA 7(A) loans over 10 years.
- Newtek has one of 14 SBA 7(A) nonbank SBLC licenses.
- NEWT acquired National Bank of New York for $20 million in August.
- NEWT would become a bank holding company.
- I expect NEWT’s stock to experience near-term technical pressure as core shareholders seek income elsewhere.
Why a BDC-to-BHC conversion?
- NEWT made earlier adjustments. Since hiring a BDC in 2014, the stock has done well. NEWT gained 40% year-to-date and 70% by August 2021. NEWT outperformed S&P and Russell 2000 since 2000. BHC-ing: ineptitude or management?
- When NEWT bought NBNYC, management crossed the BHC Rubicon.
- As a BHC, NEWT wouldn’t have to pay 90% of taxable revenue to shareholders, necessitating the 2021 sale.
- BDCs’ investment options are regulated, unlike BHCs. Becoming a BHC expands the list’s options.
- Institutions couldn’t invest in NEWT because of AFF&E. NEWT BHCs may be universities.
- NEWT’s conversion to a bank holding company may boost shares due to corporation tax, greater regulatory supervision, shareholder base churn, and potential dividend cut. Low-reward. As a result I rate the stock a hold.