Impacts of financial decisions
Taxi Medallion Loans Lose Value, Burdening Financial Institutions
The days of hailing a cab are quickly diminishing as app-based ride share services like Uber and Lyft gain popularity across the world. In response to this new competition, the taxi industry is suffering as medallion values plummet, sales come to a grinding halt, taxi cab profits drop, and borrowers start to default on their medallion loans.
As a result, financial institutions with medallion loan portfolios must determine the value of their loans and plan write-offs accordingly.
The rise of taxi companies
Road congestion is a significant concern in large metropolitan cities, so licensing regulations were adopted to limit or control the numbers of taxi cabs permitted to operate within certain cities. These taxi licenses, known as medallions, became valuable commodities in cities where their available numbers were restricted.
Over time, taxi drivers became entrepreneurs, often owning multiple medallions. Jurisdictions like New York City created fleet medallions, which enabled entrepreneurs and investors to establish multi-car (fleet) operations. According to New York City Taxi & Limousine Commission data, there were approximately 12,000 medallions originally issued in 1971, and today there are approximately 13,500 medallions licensed in the city.
Market speculation sends medallion values soaring
Once issued by the local jurisdiction, medallions could be sold or traded among third parties as a commodity in the market, subject to re-licensing restrictions. The constant exchange of these medallions generated significant demand in a restricted market.
Financing for these medallions typically went through a financial institution, which provided financing for a three to five year window, with collateral assignment against the borrower’s medallion and equipment. This short-term lending arrangement protected lenders from rising interest rate exposure.
After the short-term window closed, borrowers were either required to pay back the loan or refinance. Some lenders financed medallion deals on an interest-only basis as collateral values soared, and in a declining interest rate environment, medallion owners would refinance their loans multiple times to take advantage of cash flow opportunities.
While not all institutions offered taxi medallion lending, competition among lenders in the medallion market was keen, and the medallion borrowers used this to their advantage to negotiate the best terms and rates. Similar to the housing market, demand and speculation in the market caused the value of medallions to rise sharply over the years, to where the values inflated well in excess of the medallion’s economic cash flow value.
Eventually, lenders, borrowers and investors were caught in a bubble where medallion financing was no longer based on supportable cash flow modeling or supportable investor collateral, but rather a speculative inflated market value.
Taxis lose significant value with introduction of ride sharing
In 2010, ride sharing options such as Uber and Lyft hit the market, opening a once closed monopoly. By 2015, Uber was operating in full force around the world, and now even claims to have completed its one billionth ride. Ride sharing was recently estimated to have 50,000 providers in New York City, compared to the 13,500 licensed medallion taxi cabs at that time.
As a result of ride sharing, write-off and bad debt losses, unheard of in the medallion lending market prior to 2015, now exceed double digits in many financial institution portfolios. A decade ago, a New York City medallion was valued in the $300,000 – $400,000 range.
By the end of 2015, the value of a medallion had reached $1 million, and some fleet medallions were selling at more than $1.4 million. Following the introduction of ride sharing options like Uber and Lyft, a recent 2017 sale of a NYC medallion yielded approximately $240,000, a 76 percent decline in value over two short years.
Medallion borrowers looking to modify loans
Over the years, banks and credit unions packaged and sold medallion loans (loan participations) to other institutions. Because of the high demand for taxi medallions, these institutions bought the portfolios as investors, trusting the experience and savvy of the lead lenders, as well as the stability of the market. Now, these investors are sharing in taxi medallion loan portfolio losses as the market adjusts.
Many medallion borrowers have sought loan modifications such as lower interest rates, extended repayment terms, lower payments, and reductions of the principal amounts owed from their lenders. Delinquencies have increased from zero in 2015 to, in some cases, more than 25 percent in lender portfolios in 2017. And three credit unions have failed or been conserved by the National Credit Union Administration in the past two years as a result of the losses incurred on their taxi medallion lending portfolios.
How we can help
As urban transportation continues to evolve, taxi medallions will likely continue to exist in the market at a lesser level, with lending returning to underwriting on supportable financial metrics. CliftonLarsonAllen (CLA) has watched the progression of taxi medallion loans, and our financial institution professionals are aware of the loan challenges many institutions are facing following the introduction of ride share options.
We can offer help with the proper due diligence, trouble debt accounting, and valuation of your medallion loan as you adjust your institution’s portfolio through this market correction.