Because Of Uber, Are Taxi Medallion Lenders A Shorting Opportunity?

In other words is the competition from Uber decreasing the demand for taxi medallions causing the price of the medallions to drop thereby damaging the collateral of taxi medallion lenders?

In a word…yes!

For those who may be unfamiliar, in cities like New York City medallions are required for a yellow taxi to operate. The price paid for the medallion in the secondary market is dictated by supply and demand. The supply is limited by NYC which controls the number of medallions available and this number has basically not changed since the 1930’s.

In 2012 demand from institutional buyers pushed the price being paid for medallions above $1 million with company’s like Medallion Financial Corp (NASDAQ: TAXI) financing some of those purchases using the medallion as collateral for the loan.

But, based on the run-up in medallion prices followed by a sharp downturn due to the competition from Uber and Lyft, in December 2014 we wrote the article, ‘Investor Vigilance: Uber And New York City Taxi Medallions!‘

‘…Unintended consequences for investors in taxi medallions

A low-tech example of what can happen if an investor is slow to recognize either new competition or new technologies that may impact an investment is the taxi medallion financing firm Medallion Financial Corp. that trades with the symbol TAXI.

One of the firms businesses is lending money to buyers of taxi medallions with the medallion serving as collateral. As medallion prices steadily rose, investors in the stock earned an excellent dividend yield while enjoying price appreciation in TAXI’s share price as well.

But, as the nature of the competition has changed, so to has the risk to the value of the underlying portfolio of medallions and therefore the stock price has plummeted reflecting that fact…’

The reason for bringing this topic back up now is an article I read in Crain’s New York Business April 3, 2015, ‘Why I’m shorting a taxi medallion lender‘.

Does the price of TAXI stock, basically the same today as it was in December 2014, still have room to drop and thereby generate profits for those who are short?

Much of course depends on the secondary market price of medallions that raises the question of the amount of downside remaining.

Based on the opinion offered in the Crain’s article, more potential downside certainly does exist…

‘…The end game in New York City is not an elimination of taxis from the road, but stable co-existence in a freer market, with significantly lower medallion values. That’s a problem for medallion owners and lenders who bought and lent at prices that require greater cash flow than yellow cabs now generate. And those revenues are still falling.

Medallion-bearing taxis are burdened by significant costs not shared by Uber and other ridesharing drivers, namely lease fees and debt service. Eventually, as gross meter revenue continues to be diluted, medallion costs will have to be eliminated for taxi drivers to remain competitive.

Just as people walked away from their homes when the recession hit, medallion owners short on cash when a mortgage balloon payment is due and who lack equity in their medallions will have no choice but to default. Taxi medallions will be seized and resold at lower prices.

For companies like Medallion Financial and Signature Bank, low historical default rates when structural taxi supply shortages existed are not predictive of a future that includes unconstrained, free-market-based new supply. Medallion Financial showed an increase in its medallion loan-to-value ratio to 60% from 40% between September and December and an increase in its late payments to the highest levels since 2010. The trends do not lie.‘ ________________________________________________________________

Michael Haltman, President of Hallmark Abstract Service, New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.

And, for anyone either buying a property or refinancing, remember that although your attorney will likely recommend a title insurance provider you always have the right to choose your own (click here to learn more)!

If you have any questions you can reach Michael by email at mhaltman@hallmarkabstractllc.com.